Module M06 Quiz: Market Equilibrium and Perfect Competition
25 questions · Introductory · Mix of multiple choice, calculation, and short answer
How to use
Attempt each question before clicking Show Answer. For calculation questions, write out your working first.
Question 1
Lesson L01 · Market Structure
Which market structure has the most firms?
Type: Multiple Choice
- A) Oligopoly
- B) Monopoly
- C) Perfect competition
- D) Monopolistic competition
Show Answer
Answer: C) Perfect competition
Perfect competition has a very large number of small price-taking firms — the defining characteristic.
Question 2
Lesson L01 · Market Structure
Monopolistic competition differs from perfect competition mainly because:
Type: Multiple Choice
- A) Entry is blocked
- B) Products are differentiated — each firm has some pricing power over its unique product
- C) There are few firms
- D) Firms make economic profit in the long run
Show Answer
Answer: B) Products are differentiated — each firm has some pricing power over its unique product
Monopolistic competition: many firms but differentiated products (brand, style, location) give each some monopoly-like pricing power.
Question 3
Lesson L01 · Market Structure
Australia has four major banks (CBA, NAB, ANZ, Westpac) with combined market share >75%. This is:
Type: Multiple Choice
- A) Perfect competition
- B) Monopoly
- C) Oligopoly
- D) Monopolistic competition
Show Answer
Answer: C) Oligopoly
A few large firms with strategic interdependence and significant market share = oligopoly.
Question 4
Lesson L01 · Market Structure
What is a contestable market and why does it limit monopoly pricing?
Type: Short Answer
Show Answer
Answer: A contestable market is one with free entry and exit even if currently served by one firm. The threat of entry by rivals disciplines pricing — if the monopolist charges above costs, a new firm will enter and undercut them.
The discipline of potential competition can be as effective as actual competition.
Question 5
Lesson L01 · Market Structure
Which market structure is most likely to achieve both allocative and productive efficiency in long-run equilibrium?
Type: Multiple Choice
- A) Monopoly
- B) Oligopoly
- C) Perfect competition — P=MC=min ATC in long run
- D) Monopolistic competition
Show Answer
Answer: C) Perfect competition — P=MC=min ATC in long run
In perfect competition long-run equilibrium P=MC (allocative) and P=min ATC (productive) — both efficiency conditions are satisfied.
Question 6
Lesson L02 · Market Structure
In perfect competition, the demand curve facing an individual firm is:
Type: Multiple Choice
- A) Downward sloping like the market demand
- B) Perfectly horizontal at the market price (P = AR = MR)
- C) Upward sloping
- D) Vertical
Show Answer
Answer: B) Perfectly horizontal at the market price (P = AR = MR)
A price-taking firm can sell any quantity at the market price — it faces a horizontal demand curve at P*.
Question 7
Lesson L02 · Market Structure
For a perfectly competitive firm P = AR = MR because:
Type: Multiple Choice
- A) It has market power
- B) Each extra unit sold earns exactly the market price — the firm can sell any amount without affecting price
- C) Government sets price equal to average revenue
- D) Firms collude on price
Show Answer
Answer: B) Each extra unit sold earns exactly the market price — the firm can sell any amount without affecting price
As a price taker, the firm sells each unit at P. Total revenue = P×Q, so MR = P and AR = P always.
Question 8
Lesson L02 · Market Structure
Market price is $25. A wheat farmer's MC at Q=500 tonnes is $20 and at Q=520 is $28. What is the profit-maximising output?
Type: Calculation
Show Answer
Answer: Between 500 and 520 tonnes (approximately 510)
Profit max: MC=P=\(25. Since MC=\)20 at Q=500 (< P, expand) and MC=\(28 at Q=520 (> P, contract), Q* lies between 500-520, approximately where MC=\)25.
Question 9
Lesson L02 · Market Structure
Name two real-world markets that approximate perfect competition and explain why.
Type: Short Answer
Show Answer
Answer: 1. Wheat/grain markets — many small farmers selling a homogeneous product with prices set on commodity exchanges. 2. ASX share trading — many buyers and sellers of identical shares with publicly observable prices.
Both have many participants, standardised products, and price-taking behaviour.
Question 10
Lesson L02 · Market Structure
Why does the market demand curve slope downward even though each individual firm faces a horizontal demand curve?
Type: Multiple Choice
- A) It is a contradiction — they cannot both be true
- B) Market demand aggregates all consumers' behaviour — the market price must fall to induce more total consumption, even though each firm takes the market price as given
- C) Individual firms control the market price
- D) Market demand is always steeper than individual demand
Show Answer
Answer: B) Market demand aggregates all consumers' behaviour — the market price must fall to induce more total consumption, even though each firm takes the market price as given
There is no contradiction: the market demand is the aggregate of all consumers while the firm's demand is the price signal it receives from the market.
Question 11
Lesson L03 · Market Structure
The profit-maximisation condition MR=MC means:
Type: Multiple Choice
- A) The firm earns zero profit
- B) The firm expands output as long as the extra revenue from one more unit exceeds the extra cost, stopping when they are equal
- C) Marginal cost equals average cost
- D) The firm always maximises revenue
Show Answer
Answer: B) The firm expands output as long as the extra revenue from one more unit exceeds the extra cost, stopping when they are equal
If MR>MC, an extra unit adds more to revenue than cost — expand. If MR<MC, an extra unit adds more to cost — contract. Profit is maximised at MR=MC.
Question 12
Lesson L03 · Market Structure
P=\(40, ATC=\)35 at Q*=100 units. Calculate total profit.
Type: Calculation
Show Answer
Answer: $500
Profit=(P-ATC)×Q=(40-35)×100=$500
Question 13
Lesson L03 · Market Structure
P=\(40, ATC=\)35, AVC=\(28, TFC=\)700, Q*=100. Calculate total fixed costs as a share of total cost.
Type: Calculation
Show Answer
Answer: 20%
TC=ATC×Q=\(3,500. TFC=\)700. Share=700/3500=20%
Question 14
Lesson L03 · Market Structure
A firm's MC=\(50 and MR=\)60 at current output. What should it do?
Type: Short Answer
Show Answer
Answer: Expand output. Since MR>MC, producing one more unit adds $60 to revenue but only $50 to costs — a net gain of $10. The firm should keep expanding until MR=MC.
When MR>MC, expanding output increases profit.
Question 15
Lesson L03 · Market Structure
Alternative firm objectives include revenue maximisation. A revenue-maximising firm produces where:
Type: Multiple Choice
- A) MR=MC
- B) MR=0 (sells as long as MR is positive)
- C) P=ATC
- D) MC=0
Show Answer
Answer: B) MR=0 (sells as long as MR is positive)
Revenue is maximised where MR=0 (unit elastic demand). This typically means higher output and lower price than profit maximisation.
Question 16
Lesson L04 · Market Structure
A firm should shut down in the short run if:
Type: Multiple Choice
- A) It is making zero economic profit
- B) Price falls below average variable cost (P < AVC)
- C) Its fixed costs exceed variable costs
- D) Average total cost exceeds price
Show Answer
Answer: B) Price falls below average variable cost (P < AVC)
If P < AVC, the firm cannot cover its variable costs — every unit produced deepens the loss beyond the fixed cost loss of shutting down.
Question 17
Lesson L04 · Market Structure
P=\(18, AVC=\)20, ATC=$28. Should the firm produce or shut down?
Type: Calculation
Show Answer
Answer: Shut down
P=\(18 < AVC=\)20 → shut down. The firm loses less by shutting down (loses only TFC) than by producing (loses TFC + per-unit shortfall on AVC).
Question 18
Lesson L04 · Market Structure
P=\(25, AVC=\)22, ATC=$30, Q*=200. Calculate the firm's loss and compare to shutdown loss.
Type: Calculation
Show Answer
Answer: Loss operating = $1,000; Shutdown loss = TFC = $1,600
Operating loss=(P-ATC)×Q=(25-30)×200=-\(1,000. TFC=(ATC-AVC)×Q=(30-22)×200=\)1,600. Since operating loss $1,000 < TFC $1,600 → produce (minimise loss).
Question 19
Lesson L04 · Market Structure
Why are fixed costs irrelevant to the shutdown decision?
Type: Short Answer
Show Answer
Answer: Fixed costs are sunk in the short run — the firm pays them whether it produces or not. The relevant comparison is whether revenue covers variable costs. If P≥AVC the firm at least recovers its variable costs and contributes something toward fixed costs.
Only avoidable costs (variable costs) matter for the shutdown decision.
Question 20
Lesson L04 · Market Structure
The short-run supply curve of a perfectly competitive firm is:
Type: Multiple Choice
- A) The entire MC curve
- B) The MC curve above the AVC curve
- C) The ATC curve
- D) The AVC curve
Show Answer
Answer: B) The MC curve above the AVC curve
The firm supplies only if P≥AVC. Below that price it shuts down. So supply = MC curve above AVC.
Question 21
Lesson L05 · Market Structure
In long-run equilibrium in perfect competition, economic profit equals:
Type: Multiple Choice
- A) Maximum possible profit
- B) Zero — entry of new firms drives price down to min ATC
- C) A normal rate of return above zero
- D) Whatever the firm desires
Show Answer
Answer: B) Zero — entry of new firms drives price down to min ATC
Economic profit attracts entry → supply increases → price falls → economic profit → zero. Long-run: P=min ATC=MC, zero economic profit.
Question 22
Lesson L05 · Market Structure
If existing firms are earning economic losses in a competitive industry, in the long run:
Type: Multiple Choice
- A) They all immediately close
- B) Some firms exit → supply decreases → price rises → remaining firms return to normal profit
- C) Government subsidises the losses
- D) Consumers must pay higher prices permanently
Show Answer
Answer: B) Some firms exit → supply decreases → price rises → remaining firms return to normal profit
Losses trigger exit → supply falls → price rises until remaining firms break even. The market self-corrects.
Question 23
Lesson L05 · Market Structure
In long-run competitive equilibrium P=\(45 and min ATC=\)45. If demand rises shifting equilibrium to P=$55, describe the adjustment.
Type: Calculation
Show Answer
Answer: New entry; price returns to $45 in long run
At P=$55, firms earn \(55-\)45=$10 economic profit per unit. New firms enter, supply increases, price falls back toward $45 (min ATC) in the long run.
Question 24
Lesson L05 · Market Structure
Zero economic profit in long-run competitive equilibrium does not mean firms earn no accounting profit. Explain.
Type: Short Answer
Show Answer
Answer: Economic profit subtracts the opportunity cost of all inputs including the owner's capital and time. Zero economic profit means the firm earns exactly its opportunity cost — a normal return. Accounting profit ignores implicit opportunity costs so it may be positive.
Normal profit = accounting profit - implicit costs. Zero economic profit = normal (accounting) profit.
Question 25
Lesson L05 · Market Structure
Perfect competition in the long run achieves which efficiency conditions simultaneously?
Type: Multiple Choice
- A) Allocative efficiency only (P=MC)
- B) Productive efficiency only (P=min ATC)
- C) Both allocative (P=MC) and productive (P=min ATC) efficiency
- D) Neither — perfect competition is inefficient
Show Answer
Answer: C) Both allocative (P=MC) and productive (P=min ATC) efficiency
Long-run competitive equilibrium: P=MC=min ATC. Both allocative and productive efficiency are achieved simultaneously.