Perfect Competition: A Comprehensive Guide for Economics Students

Question 1

Which of the following is NOT a defining characteristic of perfect competition?

Accepted Answer

Differentiated products

Answer

Many buyers and sellers

Answer

Freedom of entry and exit

Answer

Price takers

Question 2

Which characteristic is NOT a feature of perfect competition?

Accepted Answer

Barriers to market entry and exit

Answer

Numerous buyers and sellers

Answer

Identical products

Answer

Price-taking firms

Question 3

Which of the following is a defining characteristic of a perfectly competitive market?

Accepted Answer

Numerous buyers and sellers trading identical products.

Answer

Price-setting power for individual firms.

Answer

Product differentiation among firms.

Answer

Significant barriers to entry for new firms.

Question 4

In the short run, a perfectly competitive firm will produce output at a level where:

Accepted Answer

Price equals marginal cost.

Answer

Average total cost is minimized.

Answer

Economic profit is maximized.

Answer

Revenue exceeds total variable cost.

Question 5

In the long run, a perfectly competitive industry will experience:

Accepted Answer

Zero economic profits for all firms.

Answer

Persistent barriers to entry for new firms.

Answer

Increasing returns to scale for existing firms.

Question 6

Which of the following is NOT considered a market failure?

Accepted Answer

Perfect competition.

Answer

Externalities.

Answer

Public goods.

Answer

Natural monopolies.

Question 7

A perfectly competitive firm incurring losses in the short run should:

Accepted Answer

Exit the industry.

Answer

Elevate prices above marginal cost.

Answer

Invest heavily in new technology.

Answer

Increase production output.

Question 8

One of the advantages of perfect competition is:

Accepted Answer

Efficient allocation of resources.

Answer

Barriers to entry for new firms.

Answer

Higher prices for consumers.

Answer

Significant market power for individual firms.

Question 9

A potential disadvantage of perfect competition is:

Accepted Answer

Limited product differentiation among firms.

Answer

High profit margins for firms.

Answer

Increased consumer choice.

Answer

Stable market prices.

Question 10

An industry most likely to exhibit the characteristics of perfect competition is:

Accepted Answer

Agriculture.

Answer

Telecommunications.

Answer

Healthcare.

Answer

Automobile manufacturing.

Question 11

Which of the following is a defining characteristic of perfect competition?

Accepted Answer

Price takers

Answer

Few buyers or sellers

Answer

Firms have significant market power

Answer

Differentiated products

Question 12

In the long run, a perfectly competitive firm will:

Accepted Answer

Enter or exit the industry until normal profits are earned

Answer

Produce at a loss to gain market share

Answer

Raise prices to cover costs

Question 13

Which of the following is a key advantage of perfect competition?

Accepted Answer

Efficient allocation of resources

Answer

Limited choice for consumers

Answer

Higher prices for consumers

Answer

High barriers to entry

Question 14

In a perfectly competitive market, the demand curve facing an individual firm is:

Accepted Answer

Perfectly elastic

Answer

Upward sloping

Answer

Perfectly inelastic

Answer

Downward sloping

Question 15

Which of the following is a characteristic of a perfectly competitive industry?

Accepted Answer

Numerous small firms

Answer

One dominant firm

Answer

High barriers to entry

Question 16

In the short run, a perfectly competitive firm maximizes profits by producing where:

Accepted Answer

Marginal cost equals marginal revenue

Answer

Total cost equals total revenue

Answer

Average cost equals average revenue

Question 17

Which of the following is **not** a defining characteristic of perfect competition?

Accepted Answer

Significant barriers to entry or exit

Answer

Numerous buyers and sellers

Answer

Firms are price takers

Answer

Homogeneous products

Question 18

In the short run, a perfectly competitive firm maximizes profits when:

Accepted Answer

Marginal revenue equals marginal cost

Answer

Average revenue equals average cost

Answer

Fixed costs are covered

Answer

Total revenue equals total cost

Question 19

In the long run, for a perfectly competitive industry experiencing positive economic profits, what will occur?

Accepted Answer

New firms will enter the market, increasing supply, driving down prices and eliminating profits

Answer

Firms will collectively agree to limit production to maintain high prices

Answer

The government will intervene to regulate the industry and prevent excessive profits

Question 20

In perfect competition, the socially optimal output level is achieved when:

Accepted Answer

Marginal cost equals marginal social benefit

Answer

Average revenue equals average cost

Answer

Total cost equals total revenue

Answer

Firms maximize their individual profits

Question 21

Which of the following is an advantage of perfect competition?

Accepted Answer

Efficient allocation of resources

Answer

Limited consumer choice

Answer

Barriers to innovation

Answer

High prices for consumers

Question 22

If demand for a product in a perfectly competitive market decreases, what is the likely impact on a firm's short-run equilibrium?

Accepted Answer

Both output and price will fall

Answer

There will be no change in output or price

Answer

Output will fall, but price will rise

Answer

Output will rise, but price will fall

Question 23

Which of the following industries closely resembles a perfectly competitive market?

Accepted Answer

Wheat farming

Answer

Healthcare services

Answer

Telecommunications

Answer

Automobile manufacturing

Question 24

Which of the following is **not** a characteristic of perfect competition?

Accepted Answer

Price makers

Answer

Identical products

Answer

Zero barriers to entry or exit

Answer

Many buyers and sellers

Question 25

In the **short run**, a perfectly competitive firm will:

Accepted Answer

Produce at the output level where marginal cost equals price.

Answer

Produce at the output level where average total cost is minimized.

Answer

Always make a profit.

Question 26

What is the impact of a **decrease** in demand on a perfectly competitive industry?

Accepted Answer

A decrease in industry output and price.

Answer

An increase in industry output and a decrease in price.

Answer

An increase in industry output and price.

Answer

A decrease in industry output and an increase in price.

Question 27

What is the impact of an **increase** in supply on a perfectly competitive market?

Accepted Answer

A decrease in equilibrium price and an increase in equilibrium quantity.

Answer

An increase in equilibrium price and a decrease in equilibrium quantity.

Answer

A decrease in equilibrium price and a decrease in equilibrium quantity.

Question 28

Which of the following is **not** an assumption of perfect competition?

Accepted Answer

Firms produce differentiated products.

Answer

There are many buyers and sellers.

Answer

Firms are price takers.

Answer

There are no barriers to entry or exit.

Question 29

What is the **key** difference between a competitive market and a monopolistic market?

Accepted Answer

In a competitive market, many buyers and sellers compete with identical products, while in a monopolistic market, there is only one seller.

Answer

In a competitive market, prices are higher than in a monopolistic market.

Question 30

What is the **primary** role of government in a perfectly competitive market?

Accepted Answer

To ensure that the market operates efficiently and that consumers are protected.

Answer

To set prices and quantities in the market.

Answer

To provide subsidies to firms in the market.

Question 31

What is the concept of **consumer surplus** in perfect competition?

Accepted Answer

The difference between the price consumers are willing to pay for a good and the price they actually pay.

Answer

The difference between the price producers are willing to sell a good for and the price they actually sell it for.

Question 32

Which of the following is NOT a characteristic of a perfectly competitive market?

Accepted Answer

Firms have market power.

Answer

Numerous buyers and sellers.

Answer

Homogeneous products.

Answer

Free entry and exit.

Question 33

In the short run, a perfectly competitive firm maximizes profit by producing at the output level where:

Accepted Answer

Marginal revenue equals marginal cost.

Answer

Marginal cost equals average revenue.

Answer

Average revenue equals marginal cost.

Answer

Average revenue equals average cost.

Question 34

In the long run, a perfectly competitive firm will:

Accepted Answer

Earn zero economic profit.

Answer

Earn positive economic profit.

Answer

Produce at a loss.

Answer

Exit the market.

Question 35

Which of the following is NOT a determinant of market demand in a perfectly competitive market?

Accepted Answer

A firm's output.

Answer

The income of consumers.

Answer

The price of the product.

Answer

Consumer tastes and preferences.

Question 36

The equilibrium price in a perfectly competitive market is determined by:

Accepted Answer

The intersection of the market demand and supply curves.

Answer

Firms' pricing strategies.

Answer

Government intervention.

Question 37

In the short run, a supply shock that increases production costs for firms in a perfectly competitive industry will lead to:

Accepted Answer

A decrease in supply and an increase in price.

Answer

No change in supply and an increase in price.

Answer

No change in supply and no change in price.

Answer

A decrease in supply and no change in price.

Question 38

Which of the following is a potential benefit of perfect competition?

Accepted Answer

Efficient allocation of resources.

Answer

High prices for consumers.

Answer

Economic inequality.

Answer

Monopolization of the market.

Question 39

Which of the following is a barrier to entry in a perfectly competitive market?

Accepted Answer

Patents.

Answer

Low fixed costs.

Answer

Perfect information.

Answer

Free movement of resources.

Question 40

The concept of consumer sovereignty suggests that:

Accepted Answer

Consumers ultimately determine what goods and services are produced in a perfectly competitive market.

Answer

Firms have complete control over the market.

Answer

Government intervention is necessary to protect consumers.

Question 41

Which of the following is NOT a characteristic of perfect competition?

Accepted Answer

Firms have market power.

Answer

Products are homogeneous.

Answer

There are many buyers and sellers.

Answer

Firms are price takers.

Question 42

In the short run, a perfectly competitive firm maximizes profits by producing at the quantity where:

Accepted Answer

Marginal revenue (MR) equals marginal cost (MC).

Answer

Price (P) is greater than marginal cost (MC).

Answer

Total revenue (TR) equals total cost (TC).

Answer

Price (P) equals average cost (AC).

Question 43

The demand curve facing a perfectly competitive firm is:

Accepted Answer

Perfectly elastic.

Answer

Downward sloping.

Answer

Inelastic.

Answer

Upward sloping.

Question 44

Which of the following will cause a movement along a firm's supply curve in perfect competition?

Accepted Answer

A change in input prices.

Answer

A change in technology.

Answer

A change in the number of firms.

Answer

A change in government policy.

Question 45

In a perfectly competitive market, the price elasticity of demand for an individual firm's product is:

Accepted Answer

Perfectly elastic.

Answer

Inelastic.

Answer

Zero.

Answer

Unit elastic.

Question 46

Which of the following is NOT a characteristic of a perfectly competitive market?

Accepted Answer

Firms have market power.

Answer

Free entry and exit.

Answer

Numerous buyers and sellers.

Answer

Identical products.

Question 47

In the long run, a perfectly competitive industry will be in equilibrium when:

Accepted Answer

Price equals the minimum average total cost (ATC).

Answer

Price equals the maximum average total cost (ATC).

Answer

Price is above marginal cost (MC).

Question 48

In a perfectly competitive market, the demand curve facing an individual firm is:

Accepted Answer

Perfectly elastic.

Answer

Perfectly inelastic.

Answer

Downward sloping.

Answer

Upward sloping.

Question 49

In a perfectly competitive market, the profit-maximizing output level is where:

Accepted Answer

Marginal cost (MC) equals marginal revenue (MR).

Answer

Total revenue (TR) is maximized.

Answer

Average total cost (ATC) is minimized.

Answer

Average variable cost (AVC) is minimized.

Question 50

The equilibrium price in a perfectly competitive market is determined by:

Accepted Answer

The intersection of the supply and demand curves.

Answer

Government intervention.

Answer

A cartel agreement.

Answer

A monopolist's pricing decision.