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

There are five assumptions in the perfectly competitive model of markets: (1) goods are identical, rival, and excludable; (2) buyers and sellers have sufficiently information to make informed decisions; (3) there are no external effects; and two others. List the two other assumptions and discuss their significance in a sentence or two.

The other two assumptions are: 1) everyone is a price taker; and 2) there is free entry and exit. The price taking assumption implies the demand perceived by a seller is perfectly elastic. That is, they can sell as much or as little as they want without affecting the market price. Also, when the firm is a price taker, the profit maximizing rule: MR = MC, can be written P = MC since price equal marginal revenue in perfect competition. The market output where price equals marginal cost is the level the level of output where the sum of consumer and producer surplus is maximized. 

The free entry and exit assumption insures economic profits are zero in the long-run and more importantly, resources are perfectly mobile in response to a change in demand or supply conditions. If demand for a good increases, for example, firms will experience short-run profits, which will induce an expansion of the industry. The increased supply lowers price until profits are zero for the typical supplier.

Chapter 7—Perfect CompetitionMULTIPLE CHOICE1.Which of the following isnotan assumption of the theory of perfect competition?a.There are many sellers and many buyers, none of which is large in relation to total sales orpurchases.b.Each firm produces and sells a differentiated product.c.Buyers and sellers have all relevant information with respect to prices, product quality,and sources of supply.d.There is easy entry and exit.ANS: BDIF:Moderate

2.Examples of perfect competition includeDIF:EasyNOT: NEW

3.The theory of perfect competition generally assumes thatDIF:Moderate

4.In the theory of perfect competition,DIF:Moderate

5.Does a real-world market have to meet all the assumptions of the theory of perfect competition beforeit is considered a perfectly competitive market?a.No, probably no real-world market meets all the assumptions of the theory of perfectcompetition. All that is necessary is that a real-world market behave as if it satisfies all theassumptions.b.Yes, if a real-world market does not meet the assumptions, then it cannot be considered aperfectly competitive market.c.Yes, unless it is a new market such as the computer market. New markets are not held tothe same assumptions as old, more established markets.d.No, but it does have to meet the assumption of producing and selling a homogeneous

Which of the following is not anassumption of the theory of perfectcompetition?*b.Each firm produces and sells adifferentiated product.In the theory of perfect competition,*c.buyers and sellers of the productknow everything that there is to knowabout the product.Refer to Exhibit 23-1. The data in thistable are relevant to a perfectlycompetitive firm because

*c.it doesn't have to lower price tosell additional units of the product.Exhibit 23-1

The market demand curve in aperfectly competitive market is

The price at which a perfectlycompetitive firm sells its product isdetermined by

If, for the last unit of a good producedby a perfectly competitive firm, MR >MC, then in producing that unit thefirm*b.added more to total revenuethan it added to total costs.Refer to Exhibit 23-2. For the firm that faces the demandcurve in the exhibit,Exhibit 23-3In the short-run, if P < ATC, a perfectlycompetitive firm shouldConsider the following data: equilibrium price =

$8.50, quantity of output produced = 100 units,average total cost = $10, and average variablecost = $9. What will the firm do and why?

Exhibit 23-2Refer to Exhibit 23-3. What is the maximum profit?*a.Shut down in the short run,because price is below averagevariable cost.Refer to Exhibit 23-4. Equilibrium price is P1, andthe firm produces Q1. At this level of output,average variable cost and average total cost areindicated by the dots. Given this situation, thefirm is*b. $59

What are the assumptions of the theory of perfect competition?

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