Perfect competition requires that firms be able to enter and leave the market without restriction.
Correct Answer
True
True. Free entry and exit is one of the conditions of perfect competition, along with many buyers and sellers, identical products and complete information. It is what drives economic profit to zero in the long run.
Category: Conditions of Perfect Competition
Question 2
Buyers and sellers in a perfectly competitive market are assumed to lack information about prices and products.
Correct Answer
False
False. Perfect competition assumes complete information, meaning buyers and sellers know what they need to make rational decisions, including the going price.
Category: Conditions of Perfect Competition
Question 3
Perfect competition is a theoretical benchmark, though some markets with many sellers of very similar products come close to it.
Correct Answer
True
True. No real market meets every condition exactly, but markets such as many farm products come close. Economists use the model as a standard against which to compare real markets.
Category: Conditions of Perfect Competition
Question 4
A competitive firm's shutdown point is where its marginal cost curve crosses its average total cost curve.
Correct Answer
False
False. The shutdown point is where marginal cost crosses average variable cost. The point where marginal cost crosses average total cost is the break-even point.
Category: Shutdown Decisions
Question 5
When market demand rises in a perfectly competitive industry, firms can earn economic profits in the short run.
Correct Answer
True
True. Higher demand raises the market price above average total cost, so existing firms earn profits until new firms enter and push the price back down.
Category: Long-Run Adjustment
Question 6
A perfectly competitive firm's marginal revenue falls as it sells more units.
Correct Answer
False
False. A price taker sells every unit at the same market price, so each additional unit adds the same amount to revenue, and marginal revenue stays equal to price.
Category: Price Takers
Question 7
If a competitive market produces beyond the quantity where price equals marginal cost, the extra units cost more to make than buyers value them.
Correct Answer
True
True. Past that quantity, marginal cost exceeds price, and price reflects buyers' willingness to pay. Society would be better off producing less, which is why P = MC marks allocative efficiency.
Category: Efficiency
Question 8
In economics, calling a market outcome efficient means it is fair and desirable in every respect.
Correct Answer
False
False. Efficiency is a technical term about producing at the lowest possible cost and producing the quantity where the value buyers place on the last unit equals its marginal cost. An efficient outcome can still reflect an unequal income distribution, and the efficiency result rests on assumptions, such as no pollution, that real markets may not meet.
Category: Efficiency
Question 9
The model predicts that a monopoly generally does not reach the productive and allocative efficiency of long-run perfect competition.
Correct Answer
True
True. Perfect competition in the long run is the benchmark for efficiency. Market structures with fewer competitors, including monopoly and oligopoly, generally fall short of it.
Category: Efficiency
Question 10
A single perfectly competitive firm is large enough that changing its own output noticeably changes the market price.
Correct Answer
False
False. Each firm is a tiny part of the market, so even large changes in its own output barely affect total market supply or the price. That is why it acts as a price taker.
Category: Price Takers
Question 11
The long-run supply curve connects the market equilibrium points reached after demand changes and the industry fully adjusts through entry and exit.
Correct Answer
True
True. After a demand change, entry or exit moves the market to a new zero-profit equilibrium. Linking the old and new long-run equilibria traces out the long-run supply curve.
Category: Long-Run Supply
Question 12
When the market price equals a firm's minimum average total cost, the firm earns an economic loss.
Correct Answer
False
False. At that price, which is the break-even point, revenue covers all costs, including implicit costs, so economic profit is zero rather than negative.
Category: Profit and Loss
Question 13
For a competitive firm, comparing total revenue with total cost and setting marginal revenue equal to marginal cost point to the same profit-maximizing output.
Correct Answer
True
True. Both are ways of finding the output where profit is largest. The gap between total revenue and total cost is widest exactly where the slopes of the two curves, marginal revenue and marginal cost, are equal.
Category: Profit-Maximizing Output
Question 14
A perfectly competitive firm that is losing money in the short run must leave the industry immediately.
Correct Answer
False
False. In the short run a firm cannot escape its fixed costs, so it keeps operating if price covers average variable cost and shuts down temporarily if it does not. Leaving the industry is a long-run decision.
Category: Shutdown Decisions
Question 15
Price in a competitive market reflects what buyers are willing to pay for the last unit, which economists treat as a measure of that unit's benefit to society.
Correct Answer
True
True. Buyers' willingness to pay measures how much they value a good. Comparing this with marginal cost, the cost to society of making one more unit, is the basis for judging allocative efficiency.
Category: Efficiency
Question 16
To maximize profit, a competitive firm should keep increasing output as long as marginal cost is greater than marginal revenue.
Correct Answer
False
False. A firm should expand output while marginal revenue is greater than marginal cost. When marginal cost exceeds marginal revenue, each extra unit lowers profit, so the firm should produce less.
Category: Profit-Maximizing Output
Question 17
When the market price rises, a perfectly competitive firm moves up along its marginal cost curve and produces more.
Correct Answer
True
True. The firm produces where price equals marginal cost, and marginal cost slopes upward, so a higher price leads to a larger profit-maximizing quantity. This is why the firm's supply curve slopes upward.
Category: Short-Run Supply
Question 18
A firm earning zero economic profit earns less than it could from the best alternative use of its resources.
Correct Answer
False
False. Economic profit already subtracts implicit costs, including what the owner's resources could earn elsewhere. Zero economic profit means the firm earns exactly as much as that best alternative.
Category: Long-Run Equilibrium
Question 19
When firms leave a competitive industry after losses, the market price rises until the remaining firms break even.
Correct Answer
True
True. Exit shifts market supply to the left, which raises the price. Exit continues until price returns to the minimum of average total cost and economic profit is zero.
Category: Long-Run Adjustment
Question 20
In long-run equilibrium, a perfectly competitive firm produces where price is above minimum average total cost.
Correct Answer
False
False. In long-run equilibrium, entry and exit drive price to the minimum of average total cost, so firms earn zero economic profit. A price above that level would attract new firms.
Category: Long-Run Equilibrium