Deck 14: Firms in Competitive Markets

Question 1

A market is competitive if (i) firms have the flexibility to price their own product.
(ii) each buyer is small compared to the market.
(iii) each seller is small compared to the market.

A)(i) and (ii) only
B)(i) and (iii) only
C)(ii) and (iii) only
D)All of the above are correct.

Answer 1

C

Question 2

Table 14-1

Refer to Table 14-1.The price and quantity relationship in the table is most likely that faced by a firm in a

A)monopoly.
B)concentrated market.
C)competitive market.
D)strategic market.

Answer 2

C

Question 3

Table 14-1

Refer to Table 14-1.If the firm doubles its output from 3 to 6 units,total revenue will

A)increase by less than $39.
B)increase by exactly $39.
C)increase by more than $39.
D)It cannot be determined from the information provided.

Answer 3

B

Question 4

Table 14-1

Refer to Table 14-1.Over which range of output is average revenue equal to price?

A)1 to 5
B)3 to 7
C)5 to 9
D)Average revenue is equal to price over the whole range of output.

Question 5

Because the goods offered for sale in a competitive market are largely the same,

A)there will be few sellers in the market.
B)there will be few buyers in the market.
C)buyers will have market power.
D)sellers will have little reason to charge less than the going market price.

Question 6

For a firm in a perfectly competitive market,the price of the good is always

A)equal to marginal revenue.
B)equal to total revenue.
C)greater than average revenue.
D)equal to the firm's efficient scale of output.

Question 7

Table 14-1

Refer to Table 14-1.Over what range of output is marginal revenue declining?

A)1 to 6
B)3 to 7
C)7 to 9
D)None; marginal revenue is constant over the whole range of output.

Question 8

When a firm has little ability to influence market prices it is said to be in

A)a competitive market.
B)a strategic market.
C)a thin market.
D)a power market.

Question 9

When firms are said to be price takers,it implies that if a firm raises its price,

A)buyers will go elsewhere.
B)buyers will pay the higher price in the short run.
C)competitors will also raise their prices.
D)firms in the industry will exercise market power.

Question 10

Which of the following is NOT a characteristic of a perfectly competitive market?

A)Firms are price takers.
B)Firms have difficulty entering the market.
C)There are many sellers in the market.
D)Goods offered for sale are largely the same.

Question 11

A competitive firm might choose to set its price below the market price,because

A)this would result in higher average revenue.
B)this would result in higher profits.
C)this would result in lower total costs.
D)None of the above is correct.

Question 12

When buyers in a competitive market take the selling price as given,they are said to be

A)market entrants.
B)monopolists.
C)free riders.
D)price takers.

Question 13

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?

A)$5 and 50
B)$5 and 100
C)$10 and 50
D)$10 and 100

Question 14

In a competitive market,no single producer can influence the market price because

A)many other sellers are offering a product that is essentially identical.
B)consumers have more influence over the market price than producers do.
C)government intervention prevents firms from influencing price.
D)producers agree not to change the price.

Question 15

Of the following characteristics of competitive markets,which are necessary for firms to be price takers? (i) There are many sellers.
(ii) Firms can freely enter or exit the market.
(iii) Goods offered for sale are largely the same.

A)(i) and (ii) only
B)(i) and (iii) only
C)(ii) only
D)All are necessary.

Question 16

In a competitive market,the actions of any single buyer or seller will

A)have a negligible impact on the market price.
B)have little effect on overall production but will ultimately change final product price.
C)cause a noticeable change in overall production and a change in final product price.
D)adversely affect the profitability of more than one firm in the market.

Question 17

Whenever a perfectly competitive firm chooses to change its level of output,holding the price of the product constant,its marginal revenue

A)increases if MR < ATC and decreases if MR > ATC.
B)does not change.
C)increases.
D)decreases.

Question 18

If a firm in a perfectly competitive market triples the number of units of output sold,then total revenue will

A)more than triple.
B)less than triple.
C)exactly triple.
D)Any of the above may be true depending on the firm's labor productivity.

Question 19

Suppose a firm in a competitive market produces and sells 8 units of output and has a marginal revenue of $8.00.What would be the firm's total revenue if it instead produced and sold 4 units of output?

A)$4.00
B)$8.00
C)$32.00
D)$64.00

Question 20

Which of the following statements best reflects a price-taking firm?

A)If the firm were to charge more than the going price, it would sell none of its goods.
B)The firm has an incentive to charge less than the market price to earn higher revenue.
C)The firm can sell only a limited amount of output at the market price before the market price will fall.
D)Price-taking firms maximize profits by charging a price above marginal cost.

Question 21

Which of the following statements regarding a competitive market is false?

A)There are many buyers and many sellers in the market.
B)Because of firm location or product differences, some firms can charge a higher price than other firms and still maintain their sales volume.
C)Price and average revenue are equal.
D)Price and marginal revenue are equal.

Question 22

In a competitive market,

A)no single buyer or seller can influence the price of the product.
B)there is a small number of sellers.
C)the goods offered by the different sellers are markedly different.
D)accounting profit is driven to zero as firms freely enter and exit the market.

Question 23

Scenario 14-1
As part of an estate settlement Mary received $1 million. She decided to use the money to purchase a small business in Anywhere, USA. If Mary would have invested the $1 million in a risk-free bond fund she could have made $100,000 each year. She also quit her job with Lucky.Com Inc. to devote all of her time to her new business; her salary at Lucky.Com Inc. was $75,000 per year.
Refer to Scenario 14-1.At the end of the first year of operating her new business,Mary's accountant reported an accounting profit of $150,000.What was Mary's economic profit?

A)$25,000 loss
B)$50,000 loss
C)$25,000 profit
D)$150,000 profit

Question 24

As a general rule,when accountants calculate profit they account for explicit costs but usually ignore

A)certain outlays of money by the firm.
B)implicit costs.
C)operating costs.
D)fixed costs.

Question 25

For a competitive firm,

A)Total revenue = Average revenue.
B)Total revenue = Marginal revenue.
C)Total cost = Marginal revenue.
D)Average revenue = Marginal revenue.

Question 26

Suppose a firm in a competitive market reduces its output by 20 percent.As a result,the price of its output is likely to

A)increase.
B)remain unchanged.
C)decrease by less than 20 percent.
D)decrease by more than 20 percent.

Question 27

When a profit-maximizing firm in a competitive market has zero economic profit,accounting profit

A)is negative (accounting losses).
B)is positive.
C)is also zero.
D)could be positive, negative or zero.

Question 28

Table 14-2
The following table presents cost and revenue information for Soper's Port Vineyard.

Refer to Table 14-2.Consumers are willing to pay $120 per unit of port wine.What is the total revenue from selling 4 units?

A)$120
B)$217
C)$263
D)$480

Question 29

Which of the following expressions is correct for a competitive firm?

A)Profit = (Quantity of output) x (Price - Average total cost)
B)Marginal revenue = (Change in total revenue)/(Quantity of output)
C)Average cost = Total variable cost/Quantity of output
D)Average revenue = (Marginal revenue) x (Quantity of output)

Question 30

Changes in the output of a perfectly competitive firm,without any change in the price of the product,will change the firm's

A)total revenue.
B)marginal revenue.
C)average revenue.
D)All of the above are correct.

Question 31

If ABC Company sells its product in a competitive market,then

A)the price of that product depends on the quantity of the product that ABC Company produces and sells since ABC Company's demand curve is downward sloping.
B)ABC Company's total revenue must be proportional to its quantity of output.
C)ABC Company's total cost must be proportional to its quantity of output.
D)ABC Company's total revenue must be equal to its average revenue.

Question 32

Suppose that in a competitive market the market price is $2.50.What is marginal revenue for the last unit sold by the typical firm in this market?

A)Less than $2.50.
B)More than $2.50.
C)$2.50.
D)The marginal revenue cannot be determined without knowing the actual quantity sold by the typical firm.

Question 33

The Wheeler Wheat Farm sells wheat to a grain broker in Seattle,Washington.Since the market for wheat is generally considered to be competitive,the Wheeler Farm does not

A)choose the quantity of wheat to produce.
B)choose the price at which it sells its wheat.
C)have any fixed costs of production.
D)set marginal revenue equal to marginal cost to maximize profit.

Question 34

Table 14-2
The following table presents cost and revenue information for Soper's Port Vineyard.

Refer to Table 14-2.Consumers are willing to pay $120 per unit of port wine.What is the total revenue from selling 7 units?

A)$120
B)$700
C)$820
D)$840

Question 35

In calculating accounting profit,accountants typically don't include

A)long-run costs.
B)sunk costs.
C)explicit costs of production.
D)opportunity costs that do not involve an outflow of money.

Question 36

Scenario 14-1
As part of an estate settlement Mary received $1 million. She decided to use the money to purchase a small business in Anywhere, USA. If Mary would have invested the $1 million in a risk-free bond fund she could have made $100,000 each year. She also quit her job with Lucky.Com Inc. to devote all of her time to her new business; her salary at Lucky.Com Inc. was $75,000 per year.
Refer to Scenario 14-1.How large would Mary's accounting profits need to be to allow her to attain zero economic profit?

A)$100,000
B)$125,000
C)$175,000
D)$225,000

Question 37

Which of the following statements regarding a competitive firm is true?

A)Since demand is downward sloping, if a firm increases its level of output, the firm will have to charge a lower price to sell the additional output.
B)If a firm raises its price, the firm may be able to increase its total revenue even though it will sell fewer units.
C)By lowering its price below the market price, the firm will benefit from being able to sell more units at the lower price than it could have sold by charging the market price.
D)For all firms, average revenue equals the price of the good.

Question 38

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.

Question 39

When a competitive firm triples the amount of output it sells,

A)its total revenue triples.
B)its average revenue triples.
C)its marginal revenue triples.
D)its profit must increase.

Question 40

Scenario 14-1
As part of an estate settlement Mary received $1 million. She decided to use the money to purchase a small business in Anywhere, USA. If Mary would have invested the $1 million in a risk-free bond fund she could have made $100,000 each year. She also quit her job with Lucky.Com Inc. to devote all of her time to her new business; her salary at Lucky.Com Inc. was $75,000 per year.
Refer to Scenario 14-1.What are Mary's opportunity costs of operating her new business?

A)$25,000
B)$75,000
C)$100,000
D)$175,000

Question 41

The Wheeler Wheat Farm sells wheat to a grain broker in Seattle,Washington.Since the market for wheat is generally considered to be competitive,the Wheeler Wheat Farm maximizes its profit by choosing

A)to produce the quantity at which average variable cost is minimized.
B)to produce the quantity at which average fixed cost is minimized.
C)to sell its wheat at a price where marginal cost is equal to average total cost.
D)the quantity at which market price is equal to the farm's marginal cost of production.

Question 42

Table 14-2
The following table presents cost and revenue information for Soper's Port Vineyard.

Refer to Table 14-2.Consumers are willing to pay $120 per unit of port wine.What is Soper's Port Vineyard's economic profit at their profit maximizing point?

A)$78
B)$243
C)$278
D)$375

Question 43

Which of the following firms is the closest to being a perfectly competitive firm?

A)A hot dog vendor in New York
B)Microsoft Corporation
C)Ford Motor Company
D)The campus bookstore

Question 44

Table 14-3
Use the information for a competitive firm in the table below to answer the following questions.

Refer to Table 14-3.At a production level of 4 units which of the following is true?

A)Marginal cost is $6.
B)Total revenue is greater than variable cost.
C)Marginal revenue is less than marginal cost.
D)The firm is maximizing profit.

Question 45

If the market elasticity of demand for potatoes is -0.3 in a perfectly competitive market,then the individual farmer's elasticity of demand

A)will also be -0.3.
B)depends on how large a crop the farmer produces.
C)will range between -0.3 and -1.0.
D)will be infinite.

Question 46

One of the defining characteristics of a perfectly competitive market is

A)a small number of sellers.
B)a large number of buyers and a small number of sellers.
C)a standardized product.
D)significant advertising by firms to promote their products.

Question 47

Table 14-2
The following table presents cost and revenue information for Soper's Port Vineyard.

Refer to Table 14-2.Consumers are willing to pay $120 per unit of port wine.What is the marginal cost of the 1st unit?

A)$50
B)$75
C)$80
D)$150

Question 48

Table 14-3
Use the information for a competitive firm in the table below to answer the following questions.

Refer to Table 14-3.If this firm chooses to maximize profit it will choose a level of output where marginal revenue is equal to

A)6
B)7
C)8
D)9

Question 49

Table 14-3
Use the information for a competitive firm in the table below to answer the following questions.

Refer to Table 14-3.The maximum profit available to this firm is

A)$2
B)$3
C)$4
D)$5

Question 50

Comparison of marginal revenue to marginal cost (i) reveals the contribution of the last unit of production to total profit.
(ii) is helpful in making profit-maximizing production decisions.
(iii) tells a firm whether its fixed costs are too high.

A)(i) only
B)(i) and (ii) only
C)(ii) and (iii) only
D)(i) and (iii) only

Question 51

Table 14-3
Use the information for a competitive firm in the table below to answer the following questions.

Refer to Table 14-3.If the firm finds that its marginal cost is $5,it should

A)reduce fixed costs by lowering production.
B)increase production to maximize profit.
C)decrease production to maximize profit.
D)maintain its current level of production to maximize profit.

Question 52

Total profit for a firm is calculated as

A)(marginal revenue) minus (average cost).
B)(average revenue) minus (average cost).
C)(marginal revenue) minus (marginal cost).
D)(price minus average cost) times (quantity of output).

Question 53

Free entry means that

A)there are no costs of entering into an industry.
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.

Question 54

Table 14-3
Use the information for a competitive firm in the table below to answer the following questions.

Refer to Table 14-3.If the firm finds that its marginal cost is $11,it should

A)increase production to maximize profit.
B)increase the price of the product to maximize profit.
C)advertise to attract additional buyers to maximize profit.
D)reduce production to increase profit.

Question 55

Table 14-2
The following table presents cost and revenue information for Soper's Port Vineyard.

Refer to Table 14-2.Consumers are willing to pay $120 per unit of port wine.What is the average revenue when 4 units are sold?

A)$50
B)$120
C)$125
D)$130

Question 56

Table 14-3
Use the information for a competitive firm in the table below to answer the following questions.

Refer to Table 14-3.At which quantity of output is marginal revenue equal to marginal cost?

A)3
B)6
C)8
D)9

Question 57

Table 14-2
The following table presents cost and revenue information for Soper's Port Vineyard.

Refer to Table 14-2.Consumers are willing to pay $120 per unit of port wine.What is the marginal revenue from selling the 3rd unit?

A)$50
B)$80
C)$120
D)$140

Question 58

Table 14-2
The following table presents cost and revenue information for Soper's Port Vineyard.

Refer to Table 14-2.Consumers are willing to pay $120 per unit of port wine.What is the marginal cost of the 8th unit?

A)$0
B)$100
C)$120
D)$140

Question 59

When marginal revenue equals marginal cost,the firm

A)should increase the level of production to maximize its profit.
B)may be minimizing its losses, rather than maximizing its profit.
C)must be generating positive economic profits.
D)must be generating positive accounting profits.

Question 60

If marginal cost exceeds marginal revenue,the firm

A)is most likely to be at a profit-maximizing level of output.
B)should increase the level of production to maximize its profit.
C)must be experiencing losses.
D)may still be earning a positive accounting profit.

Question 61

A profit-maximizing firm in a competitive market will always make marginal adjustments to production as long as

A)average revenue is greater than average total cost.
B)average revenue is equal to marginal cost.
C)marginal cost is greater than average total cost.
D)price is above or below marginal cost.

Question 62

Figure 14-3
The figure below depicts the cost structure of a profit-maximizing firm in a competitive market.

Refer to Figure 14-3.Which line segment best reflects the long-run supply curve for this firm?

A)ABCD
B)BC
C)ABC
D)None of the above, the long-run supply curve requires knowledge of the average variable cost structure.

Question 63

Shrimp Galore,a shrimp harvesting business in the Pacific Northwest,has a 30-year loan on its shrimp harvesting boat.The annual loan payment is $25,000 and the boat has a market (salvage)value that exceeds its outstanding loan balance.Prior to the 2001 shrimp harvesting season,Shrimp Galore's accountant predicted that at expected market prices for shrimp,Shrimp Galore would have a net loss of $75,000 dollars after paying all 2001 expenses (including the annual loan payment).In this case,Shrimp Galore should

A)produce nothing and experience a loss of $25,000.
B)produce nothing and experience a loss of $75,000.
C)continue to operate because expected profits will rise in the future.
D)continue to operate even though it predicts a loss of $75,000.

Question 64

Figure 14-1
The graph below depicts the cost structure for a firm in a competitive market.

Refer to Figure 14-1.When price rises from P₃ to P₄,the firm finds that

A)fixed costs are lower at a production level of 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.

Question 65

Suppose a profit-maximizing firm in a competitive market produces rubber bands.When the market price for rubber bands falls below the minimum of its average total cost,but still lies above the minimum of average variable cost,the firm

A)will experience losses but will continue to produce rubber bands.
B)will shut down.
C)will be earning both economic and accounting profits.
D)should raise the price of its product.

Question 66

When fixed costs are ignored because they are irrelevant to a business's production decision,they are called

A)explicit costs.
B)implicit costs.
C)sunk costs.
D)opportunity costs.

Question 67

When a perfectly competitive firm decides to shut down,it is most likely that

A)marginal cost is above average variable cost.
B)marginal cost is above average total cost.
C)price is below the firm's average variable cost.
D)fixed costs exceed variable costs.

Question 68

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.

Question 69

Figure 14-2
The figure below depicts the cost structure of a profit-maximizing firm in a competitive market.

Refer to Figure 14-2.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)DE
D)AB

Question 70

Figure 14-2
The figure below depicts the cost structure of a profit-maximizing firm in a competitive market.

Refer to Figure 14-2.Which line segment best reflects the short-run supply curve for this firm?

A)ABCE
B)CD
C)DE
D)BCD

Question 71

When economists refer to a production cost that has already been committed and cannot be recovered,they use the term

A)implicit cost.
B)explicit cost.
C)variable cost.
D)sunk cost.

Question 72

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.

Question 73

As a general rule,profit-maximizing producers in a competitive market produce output at a point where

A)marginal cost is increasing.
B)marginal cost is decreasing.
C)marginal revenue is increasing.
D)price is less than marginal revenue.

Question 74

When calculating marginal cost,what must the firm know?

A)Sunk cost
B)Variable cost
C)Fixed cost
D)Price

Question 75

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.

Question 76

Figure 14-3
The figure below depicts the cost structure of a profit-maximizing firm in a competitive market.

Refer to Figure 14-3.This firm will exit the market for any price on the line segment

A)AB
B)BC
C)CD
D)None of the above

Question 77

Figure 14-1
The graph below depicts the cost structure for a firm in a competitive market.

Refer to Figure 14-1.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.

Question 78

Which of the following statements best reflects the production decision of a profit-maximizing firm in a competitive market when price falls below the minimum of average variable cost?

A)The firm will continue to produce to attempt to pay fixed costs.
B)The firm will immediately stop production to minimize its losses.
C)The firm will stop production as soon as it is able to pay its sunk costs.
D)The firm will continue to produce in the short run but will likely exit the market in the long run.

Question 79

Figure 14-1
The graph below depicts the cost structure for a firm in a competitive market.

Refer to Figure 14-1.When price falls from P₃ to P₁,the firm finds that

A)fixed cost is higher at a production level of Q₁ than it is at Q₃.
B)it should produce Q₁ units of output.
C)it should produce Q₃ units of output.
D)it should shut down immediately.

Question 80

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.