Solved Questions On Chapter 14

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:
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:
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:
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:
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:
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:
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:
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:
MSC: Applicative
REF:
TOP:
14-2
Total revenue
NAT: Analytic

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:
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:
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:
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:
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:
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:
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.

ANS: C
DIF:
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:
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:
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:
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:
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:
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:
REF:
TOP:
14-2
Shut down
NAT: Analytic
MSC: Interpretive

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:
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:
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:
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:
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:
MSC: Definitional
REF:
TOP:
14-2
Supply curve
NAT: Analytic

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:
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:
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:
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:
MSC: Definitional
REF:
TOP:
14-2
NAT: Analytic

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:
MSC: Definitional
REF:
TOP:
14-2
NAT: Analytic
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:
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:
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:
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:
MSC: Interpretive
REF:
TOP:
14-3
NAT: Analytic
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
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:
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:
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:
MSC: Analytical
56.
Quantity
REF:
TOP:
14-3
NAT: Analytic
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:
MSC: Interpretive
REF:
TOP:
14-3
NAT: Analytic

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:
MSC: Interpretive
REF:
TOP:
14-3
NAT: Analytic
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:
MSC: Interpretive
67.
REF:
TOP:
14-3
NAT: Analytic
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:
MSC: Interpretive
REF:
TOP:
14-3
NAT: Analytic

Solved Questions On Chapter 14

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Chapter 14/Firms in Competitive Markets 161

A key characteristic of a competitive market is that

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

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

162 Chapter 14/Firms in Competitive Markets

Chapter 14/Firms in Competitive Markets 163

164 Chapter 14/Firms in Competitive Markets

Chapter 14/Firms in Competitive Markets 165

166 Chapter 14/Firms in Competitive Markets

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

Chapter 14/Firms in Competitive Markets 167

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

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

In a perfectly competitive market, the market supply curve is

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

168 Chapter 14/Firms in Competitive Markets

The long-run supply curve for a competitive industry

Chapter 14/Firms in Competitive Markets 169

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