4.1.5.3 Perfect competition Quiz: AQA Economics, Unit 1

The 20 questions

1. In the short run, a perfectly competitive firm's demand curve is:

   • Downward sloping with unit elasticity throughout
   • Perfectly elastic at the market price
   • Perfectly inelastic at the market price
   • Upward sloping, reflecting higher prices for higher output

2. Perfectly competitive firms are price takers because:

   • They sell identical products and are too small to influence the market price
   • They collude with rivals to share out the market price, which keeps prices stable and prevents any firm from undercutting the others
   • They set a higher price than rivals to protect the quality of their products, which keeps their customers loyal in the long run
   • Government fixes all prices in the market for every firm, so no individual firm has any choice over the price it charges

3. The profit-maximising rule for a perfectly competitive firm is to produce where:

   • Marginal revenue is zero
   • Price equals marginal cost
   • Average revenue equals average cost
   • Marginal cost is at its minimum

4. In the long run in perfect competition, firms earn:

   • Losses, because prices fall below costs permanently
   • Abnormal profit, because entry is blocked
   • Normal profit only
   • Abnormal profit that rises over time

5. Which condition is NOT required for perfect competition?

   • Perfect knowledge of prices, costs and product quality for all buyers and sellers operating in the market
   • Product differentiation through branding
   • Large numbers of producers, each of which is small relative to the size of the whole market
   • Freedom of entry and exit, so that firms can join or leave the industry without facing any barriers

6. In long-run equilibrium, price equals minimum average total cost. This implies that:

   • Firms make permanent abnormal profit
   • Productive efficiency is achieved
   • Consumers pay a price above marginal cost
   • Dead-weight loss is maximised

7. Price is £8 and marginal cost is £8 at the output a perfectly competitive firm produces. Allocative efficiency is:

   • Achieved only if average fixed cost is zero
   • Achieved, since price equals marginal cost
   • Not achieved, since marginal cost is above minimum average cost
   • Not achieved, since price exceeds average cost

8. A perfectly competitive firm sells 60 units at a price of £10, with average total cost of £12. Its position is:

   • A loss of £120
   • Break-even
   • A profit of £120
   • A profit of £600

9. A perfectly competitive market has firms earning abnormal profit in the short run. What will happen in the long run?

   • New firms enter, shifting supply right and driving price down until only normal profit remains
   • Abnormal profit persists indefinitely because entry is blocked by patents and high sunk costs that no new firm can overcome
   • Firms exit the market in large numbers
   • Price rises as new firms raise barriers to entry, so that the incumbent firms protect their abnormal profit for a long period of time

10. Why does perfect competition provide a yardstick for judging real markets?

    • It assumes that firms earn large abnormal profits at all times
    • It proves that all real markets are efficient in the long run
    • It ensures that government intervention is never needed
    • It shows the efficient outcome under stated assumptions, against which real markets can be compared

11. Which assumption supports the claim that perfect competition gives an efficient allocation of resources?

    • Perfect competition requires price discrimination between buyers
    • A monopsony must exist in the labour market
    • No externalities, so private and social costs and benefits are equal
    • Firms must have strong brands to attract customers

12. A firm in a perfectly competitive market raises its price by 5% above the market price. Its likely outcome is:

    • It loses all its customers, because identical products are available at the market price
    • It gains customers, because consumers prefer higher prices as a signal of quality and so switch to the firm that charges more than its
    • Its market share rises slightly due to brand loyalty
    • Its total revenue rises because demand is inelastic

13. Which feature implies that firms in perfect competition cannot influence the market price?

    • Barriers to entry that protect incumbent firms from competition and so allow them to set the price that they judge best for the market
    • Price discrimination between different consumer groups
    • Large numbers of small producers, each supplying a tiny share of the market
    • Product differentiation through advertising campaigns that persuade buyers their brand is different from the goods sold by other firms

14. Comparing long-run outcomes, which statement is correct?

    • Both produce the same output at the same price in the long run
    • The monopoly produces more output at a lower price than the competitive firm
    • The monopoly produces at minimum average cost
    • The perfectly competitive firm produces at minimum average cost, while a monopoly produces less output at a higher price

15. In perfect competition, perfect knowledge means that:

    • Consumers know the profits of every firm in the market, so they can compare the returns that each business earns in every period
    • Firms and consumers know prices, costs and product quality across the market
    • Firms can predict every future market price exactly, so they never have to make decisions under any kind of uncertainty at all
    • Only the government holds information about market prices, and firms receive that information only when officials publish it each year

16. A perfectly competitive firm has marginal revenue of £6. Its marginal cost rises from £4 to £8 as output increases. It should stop expanding output where:

    • Marginal cost rises to £6, equal to marginal revenue
    • Average revenue reaches 12 for the firm, showing that each unit sold brings in twice the cost of production at the margin
    • Marginal cost exceeds 10 for the first time, at which point the firm has gone beyond the output that can be sold at any profit
    • Marginal cost falls back to zero after a point, which signals that the firm has reached the efficient level of output for the period

17. Why might real markets fail to reach the outcomes predicted by perfect competition?

    • Information is imperfect and products are differentiated, so firms may hold some price-setting power
    • Perfect competition is achieved in every market by default
    • Demand is always perfectly inelastic in every market
    • Firms are required by law to price at marginal cost

18. A perfectly competitive firm has price £15 and average total cost £13 in the short run. In the long run:

    • Price will stay at 15 indefinitely, because the firm's abnormal profit is protected by its brand and its reputation for quality
    • The firm will become a monopolist, since its size allows it to absorb every rival and then control the price charged in the market
    • New entry will occur, pushing price down towards minimum average total cost
    • Exit will occur, pushing price up towards maximum average cost, as the firms that remain are able to recover their losses in full

19. Freedom of exit in perfect competition means that:

    • Firms can leave at no cost, so profits are guaranteed for every firm that remains in the market over the long run period
    • The government must approve every firm's exit, so that the market's supply can be controlled and prices kept at a set level
    • Loss-making firms can leave the industry, reducing supply and raising price
    • Only the most profitable firms are allowed to leave, which means that the least efficient firms are kept in the industry

20. A government sets a price floor above the perfectly competitive equilibrium price. The likely effect is:

    • Equilibrium moves to the lowest possible price, so the floor has the effect of pushing the market to its lowest feasible level
    • Consumer surplus increases as the price rises, because buyers receive more value for the goods they purchase at the higher price level
    • A shortage, since demand rises above supply at the floor price and buyers compete with one another for the limited quantity on offer
    • A surplus, since quantity supplied exceeds quantity demanded at the higher price

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