Below you shall find the McQs and Theoretical questions on Perfect competition.
Multiple Choice Questions
1. Perfect competition is an industry with -
A) a few firms producing identical goods.
B) many firms producing goods that differ somewhat.
C) a few firms producing goods that differ somewhat in quality.
D) many firms producing identical goods.
2. In a perfectly competitive industry, there are -
A) many buyers and many sellers.
B) many sellers, but there might be only one or two buyers.
C) many buyers, but there might be only one or two sellers.
D) one firm that sets the price for the others to follow.
3. In perfect competition, restrictions on entry into an industry -
A) do not exist.
B) apply to labor but not to capital.
C) apply to both capital and labor.
D) apply to capital but not to labor.
4. In perfect competition, -
A) there are significant restrictions on entry.
B) Each firm can influence the price of the goods.
C) there are few buyers.
D) all firms in the market sell their product at the same price.
5. Economists assume that a perfectly competitive firm's objective is to maximize its -
A) revenue.
B) economic profit.
C) output price.
D) quantity sold
Theoretical Questions
1. Suppose a firm operates in a perfectly competitive market. Market price of the product that
the firm sells is $10. The firm’s cost functions are-
TC= 2+10Q-4Q2 + Q3
MC= 10-8Q+ 3Q2
(a) What level of output should the firm produce to maximize profits?
(b) Determine the level of profit at profit maximizing equilibrium.
(c) What is the minimum price required by the firm to stay in the market?
2. A perfectly competitive firm sells its products for $300. Complete the table below. Find the
following: profit-maximizing price, profit-maximizing quantity, and greatest possible profit. Be
sure to use the profit-maximization condition to find the profit-maximizing quantity.
Q P TR TC Profit MR MC
0 100
1 200
2 400
3 700
4 1100
5 1600
6 2200
7 2900
3. Draw diagram of the following situations:
(a) All the potential choice a firm has when it is experiencing an Economic loss.
(b) When no firms are entering and leaving the market in the long-run.
4. In a small, but perfectly competitive market for pineapples, there are 5 identical growers.
Each grower has the following total cost function:
, where q is thousands of pounds of pineapples produced.
The market demand for pineapple is and the market supply is , where P denotes the market
price of pineapple in USD, which all pineapple producers take as given.
a. Find the equilibrium price and quantity in the market of pineapples.
b. Each grower’s marginal cost based upon the TC equation is given by MC = 4+4q. Given
this information, and using the answer in part (a), what is an individual grower’s profit-
maximizing level of production in the short-run?
c. Calculate the grower’s total revenue, total cost, and profit at the profit-maximizing level
of production.
d. Find the equation for a representative grower’s average variable cost (AVC) curve. Why
would a grower choose to operate at a loss in the short run?
Solutions
McQs
1. D
2. A
3. A
4. D
5. B
