# What is the profit maximization point for a firm in a purely competitive environment?

Question 1

Theoretically, in a long-run cost function:

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all inputs are fixed
all inputs are considered variable
some inputs are always fixed
capital and labor are always combined in fixed proportions

Question 2

The degree of operating leverage is equal to the ____ change in ____ divided by the ____ change in ____.

percentage; sales; percentage; EBIT
unit; sales; unit; EBIT
percentage; EBIT; percentage; sales
unit; EBIT; unit; sales

Question 3

In the linear breakeven model, the difference between selling price per unit and variable cost per unit is referred to as:

variable margin per unit
variable cost ratio
contribution margin per unit
target margin per unit

Question 4

George Webb Restaurant collects on the average \$5 per customer at its breakfast & lunch diner. Its variable cost per customer averages \$3, and its annual fixed cost is \$40,000. If George Webb wants to make a profit of \$20,000 per year at the diner, it will have to serve__________ customers per year.

10,000 customers
20,000 customers
30,000 customers
40,000 customers
50,000 customers

Question 5

Break-even analysis usually assumes all of the following except:

in the short run, there is no distinction between variable and fixed costs.
revenue and cost curves are straight-lines throughout the analysis.
there appears to be perfect competition since the price is considered to remain the same regardless of quantity.
the straight-line cost curve implies that marginal cost is constant.

Question 6

In the linear breakeven model, the breakeven sales volume (in dollars) can be found by multiplying the breakeven sales volume (in units) by:

one minus the variable cost ratio
contribution margin per unit
selling price per unit
standard deviation of unit sales

Question 7

A “search good” is:

One that depends on how the product behaves over time
A product whose quality is only found out over time by finding how durable it is
Like a peach that can be examined for flaws
Like a used car, since it is easy to determine its inherent quality

Question 8

In the short-run for a purely competitive market, a manufacturer will stop production when:

the total revenue is less than total costs
the contribution to fixed costs is zero or less
the price is greater than AVC
operating at a loss

Question 9

The main difference between perfect competition and monopolistic competition is:

The number of sellers in the market
The ease of entry and exit in the industry
The degree of information about market price
The degree of product differentiation
Whether it is the short run or the long run

Question 10

Experience goods are products or services

whose performance is highly unusual
whose quality is undetectable when purchased
not likely to cause repeat purchases

Question 11

What is the profit maximization point for a firm in a purely competitive environment?

The output where P = MC
The output where P < MC
The output where P > MC
The output where MR = MC
The output where AVC < P

Question 12

Uncertainty includes all of the following except ____.

unknown effects of deliberate actions
incomplete information as to the type of competitor
random disturbances
unverifiable claims
accidents due to weather hazards
Question 13

Buyers anticipate that the temporary warehouse seller of unbranded computer equipment will

deliver high quality products consistent with expectations
not attempt to establish any warranty enforcement mechanisms
offer several prices and qualities
produce only one quality
Question 14

The demand curve facing the firm in ____ is the same as the industry demand curve.

pure competition
monopolistic competition
oligopoly
pure monopoly
Question 15

In the electric power industry, residential customers have relatively ____ demand for electricity compared with large industrial users. But contrary to price discrimination, large industrial users generally are charged ____ rates.

similar, similar
elastic, lower
elastic, higher
inelastic, lower
inelastic, higher
Question 16

In natural monopoly, AC continuously declines due to economies in distribution or in production, which tends to found in industries which face increasing returns to scale. If price were set equal to marginal cost, then:

price would equal average cost.
price would exceed average cost.
price would be below average cost.
price would be at the profit maximizing level for natural monopoly

Question 17

Declining cost industries

have upward rising AC curves.
have upward rising demand curves.
have ∩-shaped total costs.
have diseconomies of scale.
have marginal cost curves below their average cost curve.
Question 18

____ as practiced by public utilities is designed to encourage greater usage and therefore spread the fixed costs of the utility’s plant over a larger number of units of output.

Inverted block pricing
Block pricing
First degree price discrimination
Question 19

The practice by telephone companies of charging lower long-distance rates at night than during the day is an example of:

inverted block pricing
second-degree price discrimination
first-degree price discrimination
none of the above
Question 20

A cartel is a situation where firms in the industry

have an agreement to restrict output.
agree to produce identical products.
obey the rules of dominant firm price leadership.
experience the pain of a kinked demand curve.

Question 21

“Conscious parallelism of action” among oligopolistic firms is an example of ____.

intense rivalry
a formal collusive agreement
informal, or tacit, cooperation
a cartel
Question 22

Some industries that have rigid prices. In those industries, we tend to

find that output is also rigid over the business cycle
find that output varies greatly over the business cycle
find the employment in these industries is quite stable over the business cycle
find that the rate of return is negative in boom times
Question 23

In a kinked demand market, whenever one firm decides to lower its price,

other firms will automatically follow.
none of the other firms will follow.
one half of the firms follow and one half of the firms don’t follow the price cut.
other firms all decide to exit the industry
all of the other firms raise their prices.
Question 24

Even ideal cartels tend to be unstable because

firms typically prefer competition to collusion as competition, because it leads to more profits.
collusion leads to lowest possible overall profits in the industry.
oligopolistic managers are extremely risk loving.
firms can benefit by secretly selling more than they promised the other firms
Question 25

In the Cournot duopoly model, each of the two firms, in determining its profit-maximizing price-output level, assumes that the other firm’s ____ will not change.