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Chapter 14/Firms in Competitive Markets 161

Chapter 14
Sec01 - Firms in Competitive Markets - What is a Competitive Market?
MULTIPLE CHOICE
1.

A key characteristic of a competitive market is that


a. government antitrust laws regulate competition.
b. producers sell nearly identical products.
c. firms minimize total costs.
d. firms have price setting power.

ANS: B
DIF:
LOC: Perfect competition
MSC: Definitional
2.

REF:
TOP:

14-1
NAT: Analytic
Competitive markets

Which of the following is not a characteristic of a competitive market?


a. Buyers and sellers are price takers.
b. Each firm sells a virtually identical product.
c. Free entry is limited.
d. Each firm chooses an output level that maximizes profits.

ANS: C
DIF:
LOC: Perfect competition
MSC: Definitional

REF:
TOP:

14-1
NAT: Analytic
Competitive markets

38.

Suppose that a firm operating in perfectly competitive market sells 100 units of output. Its total revenues from
the sale are $500. Which of the following statements is correct?
i) Marginal revenue equals $5.
ii) Average revenue equals $5.
iii) Price equals $5.
a.
b.
c.
d.

i) only
iii) only
i) and ii) only
i), ii), and iii)

ANS: D
DIF:
LOC: Perfect competition
MSC: Analytical

REF:
TOP:

14-1
NAT: Analytic
Marginal revenue | Average revenue

Sec02 - Firms in Competitive Markets -Profit Maximization and the Competitive


Firm's Supply Curve
MULTIPLE CHOICE
1.

If a competitive firm is currently producing a level of output at which marginal revenue exceeds marginal cost,
then
a. a one-unit increase in output will increase the firm's profit.
b. a one-unit decrease in output will increase the firm's profit.
c. total revenue exceeds total cost.
d. total cost exceeds total revenue.

ANS: A
DIF:
LOC: Perfect competition
MSC: Analytical
6.

REF:
TOP:

14-2
NAT: Analytic
Competitive firms

The intersection of a firm's marginal revenue and marginal cost curves determines the level of output at which
a. total revenue is equal to variable cost.
b. total revenue is equal to fixed cost.
c. total revenue is equal to total cost.
d. profit is maximized.

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162 Chapter 14/Firms in Competitive Markets


ANS: D
DIF:
LOC: Perfect competition
MSC: Interpretive
7.

REF:
TOP:

14-2
NAT: Analytic
Competitive firms

For a certain firm, the 100th unit of output that the firm produces has a marginal revenue of $10 and a
marginal cost of $7. It follows that the
a. production of the 100th unit of output increases the firm's profit by $3.
b. production of the 100th unit of output increases the firm's average total cost by $7.
c. firm's profit-maximizing level of output is less than 100 units.
d. production of the 99th unit of output must increase the firms profit by less than $3.

ANS: A
DIF:
LOC: Perfect competition
MSC: Analytical

REF:
TOP:

14-2
NAT: Analytic
Competitive firms

Table 14-6
Johns Vineyard
Quantity
Produced
0
1
2
3
4
5
6
7
8
29.

COSTS
Total
Cost
$0
$50
$102
$157
$217
$285
$365
$462
$582

REVENUES
Total
Price
Revenue
$80
$80
$80
$80
$80
$80
$80
$80
$80

Marginal
Revenue
--

REF:
TOP:

14-2
Marginal cost

NAT: Analytic

Refer to Table 14-6. What is the marginal cost of the 8th unit?
a. $0
b. $72.75
c. $120
d. $502

ANS: C
DIF:
LOC: Perfect competition
MSC: Applicative
31.

Quantity
Demanded
0
1
2
3
4
5
6
7
8

Refer to Table 14-6. What is the marginal cost of the 5th unit?
a. $55
b. $60
c. $68
d. $80

ANS: C
DIF:
LOC: Perfect competition
MSC: Applicative
30.

Marginal
Cost
--

REF:
TOP:

14-2
Marginal cost

NAT: Analytic

Refer to Table 14-6. What is the total revenue from selling 4 units?
a. $80
b. $137
c. $320
d. $480

ANS: C
DIF:
LOC: Perfect competition
MSC: Applicative

REF:
TOP:

14-2
Total revenue

NAT: Analytic

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Chapter 14/Firms in Competitive Markets 163


32.

Refer to Table 14-6. What is the total revenue from selling 7 units?
a. $80
b. $382
c. $540
d. $560

ANS: D
DIF:
LOC: Perfect competition
MSC: Applicative
33.

REF:
TOP:

14-2
NAT: Analytic
Marginal revenue

REF:
TOP:

14-2
NAT: Analytic
Marginal revenue

REF:
TOP:

14-2
NAT: Analytic
Average revenue

REF:
TOP:

14-2
NAT: Analytic
Profit maximization

Refer to Table 14-6. What is Johns Vineyard's economic profit at its profit-maximizing output level?
a. $25
b. $75
c. $115
d. $225

ANS: C
DIF:
LOC: Perfect competition
MSC: Applicative
59.

Refer to Table 14-6. At what quantity does Johns Vineyard maximize profits?
a. 3
b. 6
c. 7
d. 8

ANS: B
DIF:
LOC: Perfect competition
MSC: Applicative
37.

NAT: Analytic

Refer to Table 14-6. What is the average revenue when 4 units are sold?
a. $0
b. $68
c. $80
d. $400

ANS: C
DIF:
LOC: Perfect competition
MSC: Applicative
36.

14-2
Total revenue

Refer to Table 14-6. What is the marginal revenue from selling the 5th unit?
a. $12
b. $68
c. $80
d. $480

ANS: C
DIF:
LOC: Perfect competition
MSC: Applicative
35.

REF:
TOP:

Refer to Table 14-6. What is the marginal revenue from selling the 1st unit?
a. $30
b. $50
c. $80
d. $160

ANS: C
DIF:
LOC: Perfect competition
MSC: Applicative
34.

REF:
TOP:

14-2
NAT: Analytic
Economic profit

When price is greater than marginal cost for a firm in a competitive market,
a. marginal cost must be falling.
b. the firm must be minimizing its losses.
c. there are opportunities to increase profit by increasing production.
d. the firm should decrease output to maximize profit.

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164 Chapter 14/Firms in Competitive Markets


ANS: C
DIF:
LOC: Perfect competition
MSC: Analytical
84.

14-2
NAT: Analytic
Profit maximization

REF:
TOP:

14-2
Profit

NAT: Analytic
MSC: Analytical

In a competitive market the price is $8. A typical firm in the market has ATC = $6, AVC = $5, and MC = $8.
How much economic profit is the firm earning in the short run?
a. $0 per unit
b. $1 per unit
c. $2 per unit
d. $3 per unit

ANS: C
DIF:
LOC: Perfect competition
86.

REF:
TOP:

Suppose that a firm is currently maximizing its short-run profit at an output of 50 units. If the current price is
$9, the marginal cost of the 50th unit is $9, and the average total cost of producing 50 units is $4, what is the
firm's profit?
a. $0
b. $200
c. $250
d. $450

ANS: C
DIF:
LOC: Perfect competition
85.

REF:
TOP:

14-2
Profit

NAT: Analytic
MSC: Analytical

Consider a firm operating in a competitive market. The firm is producing 40 units of output, has an average
total cost of production equal to $5, and is earning $240 economic profit in the short run. What is the current
market price?
a. $9
b. $10
c. $11
d. $12

ANS: C
DIF:
LOC: Perfect competition

REF:
TOP:

14-2
Profit

NAT: Analytic
MSC: Analytical

137. When total revenue is less than variable costs, a firm in a competitive market will
a. continue to operate as long as average revenue exceeds marginal cost.
b. continue to operate as long as average revenue exceeds average fixed cost.
c. shut down.
d. raise its price.
ANS: C
DIF:
LOC: Perfect competition

REF:
TOP:

14-2
Shut down

NAT: Analytic
MSC: Analytical

138. When price is below average variable cost, a firm in a competitive market will
a. shut down and incur fixed costs.
b. shut down and incur both variable and fixed costs.
c. continue to operate as long as average revenue exceeds marginal cost.
d. continue to operate as long as average revenue exceeds average fixed cost.
ANS: A
DIF:
LOC: Perfect competition

REF:
TOP:

14-2
Shut down

NAT: Analytic
MSC: Interpretive

144. A firm will shut down in the short run if the total revenue that it would get from producing and selling its
output is less than its
a. opportunity costs.
b. fixed costs.
c. variable costs.
d. total costs.
ANS: C
DIF:
LOC: Perfect competition

REF:
TOP:

14-2
Shut down

NAT: Analytic
MSC: Interpretive

This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold, copied,
or distributed without the prior consent of the publisher.

Chapter 14/Firms in Competitive Markets 165


145. A firm will shut down in the short run if, for all positive levels of output,
a. its loss exceeds its fixed costs.
b. its total revenue is less than its variable costs.
c. the price of its product is less than its average variable cost.
d. All of the above are correct.
ANS: D
DIF:
LOC: Perfect competition

REF:
TOP:

14-2
Shut down

NAT: Analytic
MSC: Interpretive

146. A firm's marginal cost has a minimum value of $2, its average variable cost has a minimum value of $4, and
its average total cost has a minimum value of $5. Then the firm will shut down if the price of its product falls
below
a. $2.
b. $4.
c. $5.
d. There is not enough information given to answer the question.
ANS: B
DIF:
LOC: Perfect competition

REF:
TOP:

14-2
Shut down

NAT: Analytic
MSC: Analytical

147. A firm's marginal cost has a minimum value of $50, its average variable cost has a minimum value of $80, and
its average total cost has a minimum value of $90. Then the firm will shut down if the price of its product falls
below
a. $90.
b. $80.
c. $50.
d. $40.
ANS: B
DIF:
LOC: Perfect competition

REF:
TOP:

14-2
Shut down

NAT: Analytic
MSC: Analytical

154. The short-run supply curve for a firm in a perfectly competitive market is
a. horizontal.
b. likely to slope downward.
c. determined by forces external to the firm.
d. the portion of its marginal cost curve that lies above its average variable cost.
ANS: D
DIF:
LOC: Perfect competition
MSC: Interpretive

REF:
TOP:

14-2
Supply curve

NAT: Analytic

158. The competitive firm's short-run supply curve is that portion of the
a. average variable cost curve that lies above marginal cost.
b. average total cost curve that lies above marginal cost.
c. marginal cost curve that lies above average variable cost.
d. marginal cost curve that lies above average total cost.
ANS: C
DIF:
LOC: Perfect competition
MSC: Definitional

REF:
TOP:

14-2
Supply curve

NAT: Analytic

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or distributed without the prior consent of the publisher.

166 Chapter 14/Firms in Competitive Markets


Figure 14-6
Price

MC
ATC

A
Quantity

161. Refer to Figure 14-6. Which line segment best reflects the short-run supply curve for this firm?
a. ABCF
b. CD
c. DF
d. BCD
ANS: A
DIF:
LOC: Perfect competition
MSC: Interpretive

REF:
TOP:

14-2
Supply curve

NAT: Analytic

162. Refer to Figure 14-6. If the firm is in a short-run position where P < AVC, it is most likely to be on what
segment of its supply curve?
a. BC
b. CD
c. DF
d. AB
ANS: D
DIF:
LOC: Perfect competition
MSC: Interpretive

REF:
TOP:

14-2
Supply curve

NAT: Analytic

163. In the long run, a firm will enter a competitive industry if


a. total revenue exceeds total cost.
b. the price exceeds average total cost.
c. the firm can earn economic profits.
d. All of the above are correct.
ANS: D
DIF:
LOC: Perfect competition
MSC: Interpretive

REF:
TOP:

14-2
NAT: Analytic
Long-run supply curve

167. The competitive firm's long-run supply curve is that portion of the marginal cost curve that lies above average
a. fixed cost.
b. variable cost.
c. total cost.
d. revenue.
ANS: C
DIF:
LOC: Perfect competition
MSC: Definitional

REF:
TOP:

14-2
NAT: Analytic
Long-run supply curve

This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold, copied,
or distributed without the prior consent of the publisher.

Chapter 14/Firms in Competitive Markets 167


168. Which of the following represents the firm's long-run condition for exiting a market?
a. exit if P < MC
b. exit if P < FC
c. exit if P < ATC
d. exit if MR < MC
ANS: C
DIF:
LOC: Perfect competition
MSC: Definitional

REF:
TOP:

14-2
NAT: Analytic
Long-run supply curve

Sec03 - Firms in Competitive Markets - The Supply Curve in a Competitive Market


MULTIPLE CHOICE
2.

In the short-run, a firm's supply curve is equal to the


a. marginal cost curve above its average variable cost curve.
b. marginal cost curve above its average total cost curve.
c. average variable cost curve above its marginal cost curve.
d. average total cost curve above its marginal cost curve.

ANS: A
DIF:
LOC: Perfect competition
MSC: Definitional
5.

14-3
Supply curve

NAT: Analytic

REF:
TOP:

14-3
NAT: Analytic
Market supply

When existing firms in a competitive market are profitable, an incentive exists for
a. new firms to seek government subsidies that would allow them to enter the market.
b. new firms to enter the market, even without government subsidies.
c. existing firms to raise prices.
d. existing firms to increase production.

ANS: B
DIF:
LOC: Perfect competition
MSC: Interpretive
7.

REF:
TOP:

In a perfectly competitive market, the market supply curve is


a. the marginal cost curve above average total cost for a representative firm.
b. the horizontal sum of all the individual firms' supply curves.
c. the vertical sum of all the individual firms supply curves.
d. always a horizontal line.

ANS: B
DIF:
LOC: Perfect competition
MSC: Definitional
6.

REF:
TOP:

14-3
NAT: Analytic
Competitive markets

The assumption of a fixed number of firms is appropriate for analysis of


a. the short run but not the long run.
b. the long run but not the short run.
c. both the short run and the long run.
d. neither the short run nor the long run.

ANS: A
DIF:
LOC: Perfect competition
MSC: Interpretive

REF:
TOP:

14-3
NAT: Analytic
Competitive markets

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or distributed without the prior consent of the publisher.

168 Chapter 14/Firms in Competitive Markets


Figure 14-9
Price

(a)

Price

MC

(b)

S0

S1

ATC
B
P2

P2

P1

P1

P0

P0

C
D

D1
D0
Q1

55.

Q2

REF:
TOP:

14-3
NAT: Analytic
Zero-profit condition

REF:
TOP:

14-3
NAT: Analytic
Long-run supply curve

Refer to Figure 14-9. If the market starts in equilibrium at point C in panel (b), a decrease in demand will
ultimately lead to
a. more firms in the industry but lower levels of output for each firm.
b. fewer firms in the market.
c. a new long-run equilibrium at point D in panel (b).
d. lower prices once the new long-run equilibrium is reached.

ANS: B
DIF:
LOC: Perfect competition
MSC: Analytical
64.

Quantity

Refer to Figure 14-9. Assume that the market starts in equilibrium at point A in panel (b). An increase in
demand from D0 to D1 will result in
a. a new market equilibrium at point D.
b. an eventual increase in the number of firms in the market and a new long-run equilibrium at point
C.
c. rising prices and falling profits for existing firms in the market.
d. falling prices and falling profits for existing firms in the market.

ANS: B
DIF:
LOC: Perfect competition
MSC: Analytical
59.

QA QBQD QC

Refer to Figure 14-9. When the market is in long-run equilibrium at point A in panel (b), the firm represented
in panel (a) will
a. have a zero economic profit.
b. have a negative accounting profit.
c. exit the market.
d. choose to increase production to increase profit.

ANS: A
DIF:
LOC: Perfect competition
MSC: Analytical
56.

Quantity

REF:
TOP:

14-3
NAT: Analytic
Long-run supply curve

The long-run supply curve for a competitive industry


a. may be horizontal if entry into the industry lowers average total cost.
b. may be upward-sloping if higher-cost firms enter the industry.
c. will be horizontal if there is free entry into the industry.
d. will be upward-sloping if there are barriers to entry into the industry.

ANS: B
DIF:
LOC: Perfect competition
MSC: Interpretive

REF:
TOP:

14-3
NAT: Analytic
Long-run supply curve

This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold, copied,
or distributed without the prior consent of the publisher.

Chapter 14/Firms in Competitive Markets 169


65.

The long-run supply curve for a competitive industry may be upward sloping if
a. there are barriers to entry.
b. firms that enter the industry are able to do so at lower average total costs than the existing firms in
the industry.
c. some resources are available only in limited quantities.
d. accounting profits are positive.

ANS: C
DIF:
LOC: Perfect competition
MSC: Interpretive

REF:
TOP:

14-3
NAT: Analytic
Long-run supply curve

Figure 14-10
10

Price

MC

ATC

AVC

7
6

P1

P2

P3

3
2

P4

1
1

66.

Quantity

Refer to Figure 14-10. If the price is P1 in the short run, what will happen in the long run?
a. Nothing. The price is consistent with zero economic profits, so there is no incentive for firms to
enter or exit the industry.
b. Individual firms will earn positive economic profits in the short run, which will entice other firms
to enter the industry.
c. Individual firms will earn negative economic profits in the short run, which will cause some firms
to exit the industry.
d. Because the price is below the firms average variable costs, the firms will shut down.

ANS: B
DIF:
LOC: Perfect competition
MSC: Interpretive
67.

REF:
TOP:

14-3
NAT: Analytic
Long-run supply curve

Refer to Figure 14-10. If the price is P2 in the short run, what will happen in the long run?
a. Nothing. The price is consistent with zero economic profits, so there is no incentive for firms to
enter or exit the industry.
b. Individual firms will earn positive economic profits in the short run, which will entice other firms
to enter the industry.
c. Individual firms will earn negative economic profits in the short run, which will cause some firms
to exit the industry.
d. Because the price is below the firms average variable costs, the firms will shut down.

ANS: A
DIF:
LOC: Perfect competition
MSC: Interpretive

REF:
TOP:

14-3
NAT: Analytic
Long-run supply curve

This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold, copied,
or distributed without the prior consent of the publisher.