Lesson 3.4.2

3.4.2 Perfect competition Quiz: Pearson Edexcel Economics A, Unit 3

20 questions

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Lesson 3.4.2, Perfect competition: 20 multiple choice questions for the Pearson Edexcel Economics A (9EC0), Unit 3: Theme 3: Business behaviour and the labour market, written with Revision Ninja.

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The 20 questions

  1. Which set of characteristics describes perfect competition?

    • A single seller with high barriers to entry and no substitutes
    • A market where government sets all prices for all goods
    • A few sellers with differentiated products and strong interdependence
    • Many buyers and sellers, a homogeneous product, perfect information, and free entry and exit

  2. Each firm in perfect competition is a price taker. Its demand curve is:

    • Vertical, so the firm can sell any quantity at any price
    • Perfectly inelastic, so buyers ignore changes in the price
    • Horizontal (perfectly elastic) at the market price
    • Downward sloping, so the firm can set its own price

  3. In perfect competition, marginal revenue equals:

    • Marginal revenue is half of the price the firm charges
    • Average revenue and price
    • Marginal revenue is zero at every output level the firm chooses
    • Marginal revenue is above average revenue at all outputs

  4. In the short run, a perfectly competitive firm produces where:

    • AFC is zero, so fixed costs have no effect on output
    • MC equals MR (the price), which can give supernormal profit or losses
    • The firm sets a price above the market price to earn more
    • Output is zero, because the firm cannot influence any price

  5. In the long run in perfect competition, what happens to supernormal profit?

    • Entry or exit drives the price to minimum ATC, so firms earn normal profit only
    • Firms earn permanent losses, because price stays below cost
    • Firms earn permanent supernormal profit, because entry is blocked
    • Price rises to the monopoly level, so profit is high for every firm

  6. A perfectly competitive firm's market price is £6. What is the demand for the firm's output at £6.50?

    • Zero, because buyers switch to identical rivals selling at the market price
    • Unchanged, because demand for any product is unaffected by price
    • Very high, because the firm is large relative to the market
    • Perfectly elastic at £6.50, so the firm sells as much as it wants

  7. A perfectly competitive firm has MC = 2 + 0.5Q. The market price is £6. What output does it produce?

    • 4 units
    • 8 units
    • 12 units
    • 6 units

  8. A perfectly competitive firm has AVC £4, ATC £7 and price £6 at its profit-maximising output. What is the decision?

    • Keep producing in the short run, since price covers AVC
    • Raise output to double marginal revenue
    • Shut down immediately, since price is below ATC
    • Exit the market in the short run, because it is making a loss

  9. Why does entry happen in perfect competition when firms earn supernormal profit?

    • Supernormal profit forces existing firms to exit the market
    • Entry happens only when governments introduce price floors in the market
    • Firms are restricted from entering by government licensing in every case
    • Supernormal profit signals high returns, so new identical firms enter, shifting supply right and lowering the price

  10. Which assumption of perfect competition is least realistic for most real markets?

    • Perfect information and homogeneous products, which are rarely true in practice
    • Free entry into some local markets with low start-up costs
    • Many buyers and sellers acting independently of each other
    • Firms acting as price takers in some agricultural markets

  11. A perfectly competitive industry's demand falls. What happens to a single firm in the short run?

    • The firm's price rises to offset the fall in demand
    • The firm's MC falls to zero as the market shrinks
    • The market price falls, and the firm reduces output to where MC equals the new price, possibly making losses
    • The firm sells more units at a higher price than before

  12. In perfect competition, product homogeneity means:

    • Consumers see no difference between firms' outputs, so only price matters to buyers
    • Firms spend heavily on advertising to differentiate identical goods
    • Consumers have imperfect information about the products on sale
    • Firms can charge different prices for identical goods in the market

  13. Why do firms in perfect competition not advertise?

    • Advertising is illegal for all firms in competitive markets
    • Consumers do not buy goods that are advertised in the market
    • Products are identical and firms can sell all they want at the market price, so advertising gains nothing
    • Firms have supernormal profit to spend on advertising campaigns

  14. On a perfect competition diagram, a firm's short-run supply curve is:

    • The average total cost curve, above its minimum point
    • The average fixed cost curve, which falls with output
    • The average revenue curve, which is horizontal
    • The MC curve above the minimum point of AVC

  15. Evaluate perfect competition as a model for real markets.

    • Perfectly accurate for every real market in the economy
    • True only for monopoly markets, not competitive ones
    • Useful as a benchmark for efficiency, but unrealistic assumptions such as perfect information limit its direct application
    • Useless because it predicts nothing about firm behaviour at all

  16. A perfectly competitive firm has MC = 2 + Q and the market price is £10. What is its total revenue at the profit-maximising output?

    • £80
    • £18
    • £8
    • £100

  17. A perfectly competitive firm faces a price of £5 in the long run, and its minimum ATC is also £5. Which holds?

    • The firm makes a loss at this price
    • The firm earns normal profit, with productive and allocative efficiency both achieved
    • The firm earns supernormal profit at this price
    • The firm is allocatively but not productively inefficient

  18. Why might a perfectly competitive firm not set its price above the market price?

    • Its costs are zero, so it has no reason to set a higher price
    • It is forbidden by law from setting any price above the market level
    • Its marginal revenue is negative at any price above the market price
    • Buyers would switch to identical rivals selling at the market price, so its demand would fall to zero

  19. A demand shift causes supernormal profit in a perfectly competitive industry. What happens in the long run?

    • Firms become monopolies because only the largest survives
    • Only the largest firm adjusts its output while others are unaffected
    • Entry or exit adjusts the market supply until the price returns to minimum ATC
    • The price stays fixed at its higher level for ever

  20. A perfectly competitive market has 40 identical firms, each supplying q = 2P - 10, and market demand Q = 400 - 20P. What is the equilibrium price?

    • £8
    • £10
    • £6
    • £12

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