Chapter 14 Firms in Competitive Markets

Test A
1

In a competitive market, the actions of any single buyer or seller will a. have a negligible impact on the market price. b. adversely affect the profitability of more than one firm in the market. c. cause a noticeable change in market production and price. d. have little effect on market production, but ultimately change price. ANSW !" a. have a negligible impact on the market price. #$% " & ' $1" ( S )#I*N" 1 *+, )#I- " 1 !AN(*&" $ A Competitive Firm .uantity / 1 3 5 2 7 1 8 6 4
3

#otal !evenue 0/ 1 13 16 32 5/ 51 23 26 72

#otal )ost 0 1/ 12 14 37 53 2/ 24 74 8/ 63

According to the competitive firm table shown, at a production level of 2 units which of the following is true9 a. :i;ed cost is <ero. b. &arginal cost is 01. c. #otal revenue is less than variable cost. d. &arginal revenue is less than marginal cost. ANSW !" d. &arginal revenue is less than marginal cost. #$% " & ' $1" ( S )#I*N" 1 *+, )#I- " 1 INS#!=)#I*N" 1 !AN(*&" N
5

According to the competitive firm table shown, if this firm chooses to ma;imi<e profit, it will choose a level of output where marginal cost is e>ual to a. 1. b. 5. c. 7. d. 1. ANSW !" d. 1. #$% " & ' $1" ( S )#I*N" 3 *+, )#I- " 3 INS#!=)#I*N" 1 !AN(*&" N
2

If marginal cost is less than marginal revenue a. the firm must be e;periencing losses. b. the firm must be earning a profit. c. the firm must be ma;imi<ing profits. d. a profit?ma;imi<ing firm should increase the level of production. ANSW !" d. a profit?ma;imi<ing firm should increase the level of production. #$% " & ' $1" ) S )#I*N" 3 *+, )#I- " 3 !AN(*&" $

)opyright @ Aarcourt, Inc.

171

173 )hapter 12B:irms in )ompetitive &arkets

7

Which of the following is a characteristic of a perfectly competitive market9 a. :irms are price setters. b. #here are few sellers in the market. c. :irms can e;it and enter the market freely. d. All of the above are correct. ANSW !" c. :irms can e;it and enter the market freely. #$% " & ' $1" ) S )#I*N" 1 *+, )#I- " 1 !AN(*&" $ #he graph depicts the cost structure for a firm in a competitive market

According to the graph, when price falls from %2 to %1, the firm a. has greater fi;ed cost at production level .1 than at .5. b. is unwilling to produce any output. c. should produce .1 units of output. d. None of the above is correct. ANSW !" b. is unwilling to produce any output. #$% " & ' $1" ( S )#I*N" 3 *+, )#I- " 3 C!A%A" 1 !AN(*&" N
8

According to the graph, when price falls from %2 to %5, the firm finds that a. average revenue e;ceeds marginal revenue at a production level of .5. b. profits are greater than <ero at .5. c. profits are ma;imi<ed at a production level of .5. d. All of the above are correct. ANSW !" c. profits are ma;imi<ed at a production level of .5. #$% " & ' $1" ( S )#I*N" 3 *+, )#I- " 3 C!A%A" 1 !AN(*&" N
6

If a perfectly competitive firm currently produces where price is greater than marginal cost it a. will increase its profits by producing more. b. will increase its profits by producing less. c. is making positive economic profits. d. is making negative economic profits. ANSW !" a. will increase its profits by producing more. #$% " & ' $1" ) S )#I*N" 3 *+, )#I- " 3 !AN(*&" $

)opyright @ Aarcourt, Inc.

)hapter 12B:irms in )ompetitive &arkets 175

4

When a perfectly competitive firm makes a decision to shut down, it is most likely that a. price is below the minimum of average variable cost. b. fi;ed costs e;ceed variable costs. c. average fi;ed costs are rising. d. marginal cost is above average variable cost. ANSW !" a. price is below the minimum of average variable cost. #$% " & ' $1" ) S )#I*N" 3 *+, )#I- " 5 !AN(*&" $ #he figure depicts the cost structure of a profit?ma;imi<ing firm in a competitive market.

1/

According to the figure, which line segment best reflects the long?run supply curve for this firm9 a. A+ b. +) c. )( d. None of the above, the long?run supply curve re>uires knowledge of the average variable cost structure. ANSW !" c. )( #$% " & ' $1" C S )#I*N" 3 *+, )#I- " 7 C!A%A"3 !AN(*&" N
11

According to the figure, this firm will e;it the market for any price on the line segment a. )(. b. A+. c. )+. d. None of the above is correct. ANSW !" b. A+. #$% " & ' $1" C S )#I*N" 3 *+, )#I- " 2 C!A%A" 3 !AN(*&" N
13

A profit?ma;imi<ing firm making losses Dnegative profitE, but still producing output faces which of the following conditions9 a. % F A#) b. % F A-) c. +oth of the above are correct. d. Neither of the above is correct. ANSW !" b. % F A-) #$% " & ' $1" & S )#I*N" 3 *+, )#I- " 3 !AN(*&" $

)opyright @ Aarcourt, Inc.

172 )hapter 12B:irms in )ompetitive &arkets

15

#he profits of a profit?ma;imi<ing firm e>ual a. % .. b. D% G A#)E .. c. DA#) G %E .. d. D&) G A-)E .. ANSW !" b. D% G A#)E .. #$% " & ' $1" S )#I*N" 3 *+, )#I- " 3 !AN(*&" $
12

When a profit?ma;imi<ing firmHs fi;ed costs are considered sunk in the short run it a. will never show losses. b. can set price above marginal cost. c. ma;imi<es profit by choosing an output level where price e;ceeds marginal cost. d. can safely ignore fi;ed costs when deciding how much to produce. ANSW !" d. can safely ignore fi;ed costs when deciding how much to produce. #$% " & ' $1" ( S )#I*N" 3 *+, )#I- " 3 !AN(*&" $
17

In the long run, a profit?ma;imi<ing firm will choose to e;it a market when a. fi;ed costs e;ceed sunk costs. b. average fi;ed cost is rising. c. revenue from production is less than total costs. d. marginal cost e;ceeds marginal revenue at the current level of production. ANSW !" c. revenue from production is less than total costs. #$% " & ' $1" ) S )#I*N" 5 *+, )#I- " 2 !AN(*&" $ In the figure, panel DaE depicts the linear marginal cost of a firm in a competitive market and panel DbE depicts the linear market supply curve for a market with a fi;ed number of identical firms.

11

According to the figure, if there are 3// identical firms in this market, what level of output will be supplied to the market when price is 03.//9 a. 1/,/// b. 3/,/// c. 2/,/// d. It cannot be determined from the information provided. ANSW !" c. 2/,/// #$% " & ' $1" ) S )#I*N" 5 *+, )#I- " 7 C!A%A" 5 !AN(*&" N

)opyright @ Aarcourt, Inc.

)hapter 12B:irms in )ompetitive &arkets 177

18

According to the figure, when 17/ identical firms participate in this market, at what price will 17,/// units be supplied to this market9 a. 01.// b. 01.7/ c. 03.// d. It cannot be determined from the information provided. ANSW !" a. 01.// #$% " & ' $1" ) S )#I*N" 5 *+, )#I- " 7 C!A%A" 5 !AN(*&" N
16

When firms have an incentive to e;it a competitive market, their e;it will a. drive down market prices. b. drive down profits of e;isting firms in the market. c. decrease the >uantity of goods supplied in the market. d. All of the above are correct. ANSW !" c. decrease the >uantity of goods supplied in the market. #$% " & ' $1" ( S )#I*N" 5 *+, )#I- " 2 !AN(*&" $
14

In a perfectly competitive market, the process of entry or e;it ends when a. firms are operating with e;cess capacity. b. firms are making <ero economic profit. c. firms e;perience decreasing marginal revenue. d. price is e>ual to marginal cost. ANSW !" b. firms are making <ero economic profit. #$% " & ' $1" ) S )#I*N" 5 *+, )#I- " 2 !AN(*&" $
3/

If all incumbent firms and all potential firms have the same cost curves and the market is characteri<ed by free entry and e;it, the long?run market supply curve a. is e>ual to the sum of marginal cost curves. b. slopes downward. c. slopes upward. d. is hori<ontal. ANSW !" d. is hori<ontal. #$% " & ' $1" ) S )#I*N" 5 *+, )#I- " 7 !AN(*&" $
31

#he e;it of e;isting firms from a competitive market will a. decrease market supply and increase market prices. b. decrease market supply and decrease market prices. c. increase market supply and increase market prices. d. increase market supply and decrease market prices. ANSW !" a. decrease market supply and increase market prices. #$% " & ' $1" ) S )#I*N" 5 *+, )#I- " 2 !AN(*&" $
33

When firms in an industry have the same cost structure which is not changed by the entry or e;it of firms, a. the long?run market supply curve must be upward sloping. b. the long?run market supply curve must be hori<ontal. c. the long?run market supply curve must be downward sloping. d. We canHt tell anything about the shape of the long?run market supply curve. ANSW !" b. the long?run market supply curve must be hori<ontal. #$% " & ' $1" ) S )#I*N" 5 *+, )#I- " 7 !AN(*&" $

)opyright @ Aarcourt, Inc.

171 )hapter 12B:irms in )ompetitive &arkets

35

According to the figures, if the market starts in e>uilibrium at point ) in panel DbE, a decrease in demand will ultimately lead to a. a higher price. b. a new long?run e>uilibrium at point ( in panel DbE. c. fewer firms in the market. d. All of the above are correct. ANSW !" c. fewer firms in the market. #$% " & ' $1" S )#I*N" 5 *+, )#I- " 2 C!A%A" 2 !AN(*&" N
32

According to the figures, when a firm in a competitive market, like the one depicted in panel DaE, observes market price rising from %1 to %3, it is most likely the result of a. entrance of new firms into the market. b. the e;it of e;isting firms in the market. c. an increase in market supply from Supply/ to Supply1. d. an increase in market demand from (emand/ to (emand1. ANSW !" d. an increase in market demand from (emand/ to (emand1. #$% " & ' $1" ) S )#I*N" 5 *+, )#I- " 2 C!A%A" 2 !AN(*&" N
37

When a competitive market e;periences an increase in demand that induces an increase in producer costs, which of the following is most likely to arise9 a. #he long?run market supply curve will be upward sloping. b. #he condition of free entry into the market will be violated. c. %roducer profits must fall in the long run. d. All of the above are likely to occur. ANSW !" a. #he long?run market supply curve will be upward sloping. #$% " & ' $1" ( S )#I*N" 5 *+, )#I- " 7 !AN(*&" $

)opyright @ Aarcourt, Inc.

ANSW !" a. have a negligible impact on the market price. #$% " & ' $1" ( S )#I*N" 1 *+, )#I- " 1 !AN(*&" $
3

ANSW !" d. &arginal revenue is less than marginal cost. #$% " & ' $1" ( S )#I*N" 1 *+, )#I- " 1 INS#!=)#I*N" 1 !AN(*&" N
5

ANSW !" d. 1. #$% " & ' $1" ( S )#I*N" 3 *+, )#I- " 3 INS#!=)#I*N" 1 !AN(*&" N
2

ANSW !" d. a profit ma;imi<ing firm should increase the level of production. #$% " & ' $1" ) S )#I*N" 3 *+, )#I- " 3 !AN(*&" $
7

ANSW !" c. :irms can e;it and enter the market freely. #$% " & ' $1" ) S )#I*N" 1 *+, )#I- " 1 !AN(*&" $
1

ANSW !" b. is unwilling to produce any output. #$% " & ' $1" ( S )#I*N" 3 *+, )#I- " 3 C!A%A" 1 !AN(*&" N
8

#$% " &

6

ANSW !" c. profits are ma;imi<ed at a production level of .5. ' $1" ( S )#I*N" 3 *+, )#I- " 3 C!A%A" 1 !AN(*&" N

ANSW !" a. will increase its profits by producing more. #$% " & ' $1" ) S )#I*N" 3 *+, )#I- " 3 !AN(*&" $
4

ANSW !" a. price is below the minimum of average variable cost. #$% " & ' $1" ) S )#I*N" 3 *+, )#I- " 5 !AN(*&" $
1/

ANSW !" c. )( #$% " & ' $1" C S )#I*N" 3 *+, )#I- " 7 C!A%A"3 !AN(*&" N
11

ANSW !" b. A+. #$% " & ' $1" C S )#I*N" 3 *+, )#I- " 2 C!A%A" 3 !AN(*&" N
13

ANSW !" b. % F A-) #$% " & ' $1" & S )#I*N" 3 *+, )#I- " 3 !AN(*&" $
15

#$% " & ' $1"

12

ANSW !" b. D% G A#)E .. S )#I*N" 3 *+, )#I- " 3 !AN(*&" $

ANSW !" d. can safely ignore fi;ed costs when deciding how much to produce. #$% " & ' $1" ( S )#I*N" 3 *+, )#I- " 3 !AN(*&" $
17

ANSW !" c. revenue from production is less than total costs.

#$% " & ' $1" ) S )#I*N" 5 *+, )#I- " 2 !AN(*&" $
11

ANSW !" c. 2/,/// #$% " & ' $1" ) S )#I*N" 5 *+, )#I- " 7 C!A%A" 5 !AN(*&" N
18

ANSW !" a. 01.// #$% " & ' $1" ) S )#I*N" 5 *+, )#I- " 7 C!A%A" 5 !AN(*&" N
16

ANSW !" c. decrease the >uantity of goods supplied in the market. #$% " & ' $1" ( S )#I*N" 5 *+, )#I- " 2 !AN(*&" $
14

ANSW !" b. firms are making <ero economic profit. #$% " & ' $1" ) S )#I*N" 5 *+, )#I- " 2 !AN(*&" $
3/

ANSW !" d. is hori<ontal. #$% " & ' $1" ) S )#I*N" 5 *+, )#I- " 7 !AN(*&" $
31

ANSW !" a. decrease market supply and increase market prices. #$% " & ' $1" ) S )#I*N" 5 *+, )#I- " 2 !AN(*&" $
33

ANSW !" b. the long?run market supply curve must be hori<ontal. #$% " & ' $1" ) S )#I*N" 5 *+, )#I- " 7 !AN(*&" $
35

#$% " & ' $1"

32

ANSW !" c. fewer firms in the market. S )#I*N" 5 *+, )#I- " 2 C!A%A" 2 !AN(*&" N

ANSW !" d. an increase in market demand from (emand/ to (emand1. #$% " & ' $1" ) S )#I*N" 5 *+, )#I- " 2 C!A%A" 2 !AN(*&" N
37

ANSW !" a. #he long?run market supply curve will be upward sloping. #$% " & ' $1" ( S )#I*N" 5 *+, )#I- " 7 !AN(*&" $