Chapter 14—Firms in Competitive Markets
MULTIPLE CHOICE
1. 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.
2. When a firm in a competitive market produces 10 units of output, it has a marginal
revenue of $8.00. What would be the firm's total revenue when it produces 6 units of output? a. $4.80 b. $6.00 c. $48.00 d. $60.00
3. If a firm in a competitive market reduces its output by 20 percent, then 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.
4. 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.
b. ABC Company's total revenue is proportional to its quantity of output. c. ABC Company's total cost is proportional to its quantity of output. d. ABC Company's total revenue is equal to its average revenue.
5. For a competitive firm,
a. Total revenue = Average revenue. b. Total revenue = Marginal revenue. c. Total cost = Marginal revenue.
d. Average revenue = Marginal revenue.
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6. 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.
7. 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.
8. 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.
9. The short-run supply curve for a firm in a perfectly competitive market is
a. likely to be horizontal. b. likely to slope downward.
c. determined by forces external to the firm.
d. its marginal cost curve (above average variable cost).
10. When a perfectly competitive firm makes a decision 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 minimum of average variable cost. d. fixed costs exceed variable costs.
11.When a firm makes a short-run decision not to produce anything during a specified
period of time because of current market conditions, the firm is said to a. shut down. b. exit.
c. withdraw.
d. leave the industry.
12. Firms that shut down in the short run still have to pay their
a. variable costs. b. fixed costs. c. total cost.
d. All of the above are correct.
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13. 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. always exit the industry.
14. 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.
15. 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.
16. In the long run all of a firm's costs are variable. In this case the exit criterion for a profit-maximizing firm is a. price < average total cost. b. price > average total cost.
c. average revenue > average fixed cost. d. average revenue > marginal cost.
17. When profit-maximizing firms in competitive markets are earning profits, a. market demand must exceed market supply at the market equilibrium price. b. market supply must exceed market demand at the market equilibrium price. c. new firms will enter the market.
d. the most inefficient firms will be encouraged to leave the market.
18. Figure 14-5 depicts the cost structure of a firm in a competitive market. Use the figure to answer the following questions. Refer to Figure 14-5. When market price is P5, a profit-maximizing firm's profits can be represented by the area a. P5 ? Q3.
b. (P5 - P3) ? Q2. c. (P5 - P4) ? Q3.
d. When market price is P5 there are no profits.
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Figure 14-5
19. A competitive firm's short-run supply curve is part of which of the following curves?
a. marginal revenue b. average variable cost c. average total cost d. marginal cost
20. If a profit-maximizing firm in a competitive market discovers that at its current level of
production price is greater than marginal cost it should a. shut down.
b. reduce its output, but continue operating. c. keep output the same. d. increase its output.
21. For any given price, a firm in a competitive market will maximize profit by selecting the
level of output at which price intersects the a. average total cost curve. b. average variable cost curve. c. marginal cost curve. d. marginal revenue curve.
22. In the long run, a profit-maximizing firm will choose to exit a market when
a. average fixed cost is falling. b. variable costs exceed sunk costs.
c. marginal cost exceeds marginal revenue at the current level of production. d. total revenue is less than total cost.
23. If a competitive firm is currently producing a level of output at which marginal cost
exceeds marginal revenue, then
a. average revenue exceeds marginal cost. b. the firm is earning a positive profit.
c. a one-unit decrease in output would increase the firm's profit. d. All of the above are correct.
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24. In long-run equilibrium of a competitive market, the number of firms in the market
adjusts so that all of the market demand is satisfied at a price equal to a. sunk cost.
b. the maximum value of marginal cost. c. the minimum value of average total cost. d. the minimum value of average variable cost.
25. When firms in a perfectly competitive market face the same costs, in the long run they
must be operating
a. under diseconomies of scale.
b. with small, but positive, levels of profit. c. at their efficient scale.
d. All of the above are correct.
26. When some resources used in production are only available in limited quantities, it is
likely that the long-run supply curve in a competitive market is a. downward sloping. b. upward sloping. c. horizontal. d. vertical.
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