PERFECT COMPETITIVE MARKET-EXERCISES

Perfect-> price takes, P=MC, P=MR=AR, P set by market-> maximum welfare

Monopoly->only one firm-> price makers-> deadweight loss
Monopolistic competition->many sellers->price makers->deadweight loss
Oligopoly->only 2-4 firms-> price makers->deadweight loss
1. A firm has market power if it can
a. maximize profits.
b. minimize costs.
c. influence the market price of the good it sells.
d. hire as many workers as it needs at the prevailing wage rate.
2. For any competitive market, the supply curve is closely related to the
a. preferences of consumers who purchase products in that market.
b. income tax rates of consumers in that market.
c. firms’ costs of production in that market.
d. interest rates on government bonds.
3. Who is a price taker in a competitive market?
a. buyers only
b. sellers only
c. both buyers and sellers
d. neither buyers nor sellers
4. When a firm has little ability to influence market prices it is said to be in a
a. competitive market.
b. strategic market.
c. thin market.
d. power market.
5. Free entry means that
a. the government pays any entry costs for individual firms.
b. no legal barriers prevent a firm from entering an industry.
c. a firm's marginal cost is zero.
d. a firm has no fixed costs in the short run.
6. Why does a firm in a competitive industry charge the market price?
a. If a firm charge less than the market price, it loses potential revenue.
b. If a firm charge more than the market price, it loses all its customers to other firms.
c. The firm can sell as many units of output as it wants to at the market price.
d. All of the above are correct.
7. Firms that operate in perfectly competitive markets try to
a. maximize revenues.
b. maximize profits.
c. equate marginal revenue with average total cost.
d. Both b and c are correct.
Table 13-1
Quantity Total Revenue Average Marginal
Revenue Revenue
0 $0
1 $7
2 $14
3 $21
4 $28
8. Refer to Table 13-1. For a firm operating in a competitive market, the price is
a. $0.
b. $7.
c. $14.
d. $21.
9. Refer to Table 13-1. For a firm operating in a competitive market, the marginal
revenue is
a. $0.
b. $7.
c. $14.
d. $21.
10. Refer to Table 13-1. For a firm operating in a competitive market, the average
revenue is
a. $21.
b. $14.
c. $7.
d. $0.
 11. Suppose that a firm operating in perfectly competitive market sells 200 units of output
at a price of $3 each. Which of the following statements is correct? P=MR=AR
i) Marginal revenue equals $3.
ii) Average revenue equals $600.
iii Average revenue exceeds marginal revenue, but we don’t know by how much.
)
a. i) only
b. iii) only
c. i) and ii) only
d. i), ii), and iii)
12. Suppose a firm in a competitive market received $1,000 in total revenue and had a
marginal revenue of $10 for the last unit produced and sold. What is the average
revenue per unit, and how many units were sold? P=MR=AR
a. $5 and 50 units
b. $5 and 100 units
c. $10 and 50 units
d. $10 and 100 units
Table 13-3
The following table presents cost and revenue information for Soper’s Port Vineyard.

COSTS REVENUES
Quantity Total Marginal Quantity Total Marginal
Produced Cost Cost Demanded Price Revenue Revenue
0 $100 -- 0 $120 --
1 $150 1 $120 120 120
2 $202 2 $120 240 120
3 $257 3 $120 360 120
4 $317 4 $120 480 120
5 $385 5 $120 600 120
6 $465 6 $120 720 120
7 $562 7 $120 840 120
8 $682 8 $120 960 120
13. Refer to Table 13-3. What is the total revenue from selling 7 units?
a. $120
b. $490
c. $562
d. $840
14. Refer to Table 13-3. What is the total revenue from selling 4 units?
a. $120
b. $257
c. $317
d. $480
15. Refer to Table 13-3. What is the marginal revenue from selling the 3rd unit?
a. $55
b. $120
c. $137
d. $140
16. Refer to Table 13-3. What is the average revenue when 4 units are sold?
a. $60
b. $120
c. $125
d. $197
17. 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.
18. A certain competitive firm sells its output for $20 per unit. The 50th unit of output
that the firm produces has a marginal cost of $22. Which of following is not
necessarily true?
a. Production of the 50th unit of output increases the firm's total revenue by $20.
b. Production of the 50th unit of output increases the firm's total cost by $22.
c. Production of the 50th unit of output decreases the firm's profit by $2.
d. Production of the 50th unit of output increases the firm’s average variable cost by
$0.44.
19. If a competitive firm is (i) selling 1,000 units of its product at a price of $9 per unit
and (ii) earning a positive profit, then
a. its total cost is less than $9,000.
b. its marginal revenue is less than $9.
c. its average revenue is greater than $9.
d. the firm cannot be a competitive firm since competitive firms can only earn zero
profit.
20. Charlene sells cotton candy. The cotton candy industry is competitive. Charlene
hires a business consultant to analyze her company’s financial records. The
consultant recommends that Charlene increase her production. The consultant must
have concluded that Charlene’s
a. total revenues exceed her total accounting costs.
b. marginal revenue exceeds her total cost.
c. marginal revenue exceeds her marginal cost.
d. marginal cost exceeds her marginal revenue.
21. Christopher is a professional tennis player who gives tennis lessons. The industry is
competitive. Christopher hires a business consultant to analyze his financial records.
The consultant recommends that Christopher give fewer tennis lessons. The
consultant must have concluded that Christopher’s
a. total revenues exceed his total accounting costs.
b. marginal revenue exceeds his total cost.
c. marginal revenue exceeds his marginal cost.
d. marginal cost exceeds his marginal revenue.
22. Laura is a gourmet chef who runs a small catering business in a competitive industry.
Laura specializes in making wedding cakes. Laura sells 20 wedding cakes per month.
Her monthly total revenue is $5,000. The marginal cost of making a wedding cake is
$300. In order to maximize profits, Laura should
a. make more than 20 wedding cakes per month.
b. make fewer than 20 wedding cakes per month.
c. continue to make 20 wedding cakes per month.
d. We do not have enough information with which to answer the question.
Table 13-6
John’s Vineyard
COSTS REVENUES
Quantity Total Marginal Quantity Total Marginal
Produced Cost Cost Demanded Price Revenue Revenue
0 $0 -- 0 $80 --
1 $50 1 $80
2 $102 2 $80
3 $157 3 $80
4 $217 4 $80
5 $285 5 $80
6 $365 6 $80
7 $462 7 $80
8 $582 8 $80
23. Refer to Table 13-6. What is the marginal cost of the 5th unit?
a. $55
b. $60
c. $68
d. $80
24. Refer to Table 13-6. What is the marginal cost of the 8th unit?
a. $0
b. $72.75
c. $120
d. $502
25. Refer to Table 13-6. What is the total revenue from selling 4 units?
a. $80
b. $137
c. $320
d. $480
26. Refer to Table 13-6. What is the total revenue from selling 7 units?
a. $80
b. $382
c. $540
d. $560
27. Refer to Table 13-6. What is the marginal revenue from selling the 1st unit?
a. $30
b. $50
c. $80
d. $160
28. Refer to Table 13-6. What is the marginal revenue from selling the 5th unit?
a. $12
b. $68
c. $80
d. $480
29. Refer to Table 13-6. What is the average revenue when 4 units are sold?
a. $0
b. $68
c. $80
d. $400
30. Refer to Table 13-6. At what quantity does John’s Vineyard maximize profits?
a. 3
b. 6
c. 7
d. 8
31. Refer to Table 13-6. What is John’s Vineyard's economic profit at its profit-
maximizing output level?
a. $25
b. $75
c. $115
d. $225
Scenario 13-2
Assume a certain firm is producing Q = 1,000 units of output. At Q = 1,000, the firm's
marginal cost equals $20 and its average total cost equals $25. The firm sells its output for
$30 per unit.
32. Refer to Scenario 13-2. To maximize its profit, the firm should
a. increase its output.
b. continue to produce 1,000 units.
c. decrease its output but continue to produce.
d. shut down.
33. Refer to Scenario 13-2. At Q = 1,000, the firm's profits equal
a. $-5,000.
b. $2,500.
c. $5,000.
d. $10,000.
34. Refer to Scenario 13-2. At Q = 999, the firm's total cost amounts to
a. $24,970.
b. $24,975.
c. $24,980.
d. $25,025.
Figure 13-3
Price
MC

ATC

P4
AVC

P3

P2
P1

Q1 Q2 Q3 Q4 Q5 Quantity

35. Refer to Figure 13-3. When price rises from P2 to P3, the firm finds that
a. marginal cost exceeds marginal revenue at a production level of Q2.
b. if it produces at output level Q3 it will earn a positive profit.
c. expanding output to Q4 would leave the firm with losses.
d. it could increase profits by lowering output from Q3 to Q2.

36. Refer to Figure 13-3. When price falls from P3 to P1, the firm finds that it
a. decreases its fixed costs.
b. should produce Q1 units of output.
c. should produce Q3 units of output.
d. should shut down immediately.
37. Refer to Figure 13-3. When price rises from P3 to P4, the firm finds that
a. fixed costs decrease as output increases from Q3 to Q4.
b. it can earn a positive profit by increasing production to Q4.
c. profit is still maximized at a production level of Q3.
d. average revenue exceeds marginal revenue at a production level of Q4.
Figure 13-4

Price
MC ATC

AVC
P7

P6
P5
P4

P3
P2
P1

Q1 Q2 Q3 Q4 Q5 Quantity

38. Refer to Figure 13-4. When market price is P7, a profit-maximizing firm's short-run
profits can be represented by the area
a. P7 Q5.
b. P7 Q3.
c. (P7 - P5) Q3.
d. We are unable to determine the firm’s profits because the quantity that the firm
would produce is not labeled on the graph.
39. Refer to Figure 13-4. In the short run, if the market price is higher than P1 but less
than P4, individual firms in a competitive industry will earn
a. positive profits.
b. zero profits.
c. losses but will remain in business.
d. losses and will shut down.
40. Refer to Figure 13-4. In the short run,if the market price is higher than P4 but less
than P6, individual firms in a competitive industry will earn
a. positive profits.
b. zero profits.
c. losses but will remain in business.
d. losses and will shut down.
41. Refer to Figure 13-4. In the short run, if the market price is P4, individual firms in a
competitive industry will earn
a. positive profits.
b. zero profits.
c. losses but will remain in business.
d. losses and will shut down.
42. Refer to Figure 13-4. When market price is P2, a profit-maximizing firm's losses can
be represented by the area
a. (P4 - P2) Q2.
b. (P2 - P1) (Q2-Q1).
c. At a market price of P2, the firm earns profits, not losses.
d. At a market price of P2 the firm has losses, but the reference points in the figure
don't identify the losses.
THE END