Chapter 14
Firms in Competitive Markets
Multiple Choice
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. ANS: C PTS: 1 DIF: 1 REF: 14-1 TOP: Competitive markets MSC: Definitional
2. 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. ANS: A PTS: 1 DIF: 1 REF: 14-1 TOP: Competitive markets MSC: Definitional
3. 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. ANS: A PTS: 1 DIF: 2 REF: 14-1 TOP: Competitive markets MSC: Interpretive
Table 14-1 Quantity 1 2 3 4 5 6 7 8 9
4. 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. ANS: C PTS: 1 DIF: 1 REF: 14-1 TOP: Competitive markets MSC: Analytical
Price 13 13 13 13 13 13 13 13 13 574
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5. 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. ANS: D PTS: 1 DIF: 1 REF: 14-1 TOP: Average revenue MSC: Analytical
6. 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. ANS: D PTS: 1 DIF: 2 REF: 14-1 TOP: Marginal revenue MSC: Analytical
7. 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. ANS: B PTS: 1 DIF: 1 REF: 14-1 TOP: Total revenue MSC: Applicative
8. 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. ANS: A PTS: 1 DIF: 1 REF: 14-1 TOP: Marginal revenue MSC: Interpretive
9. 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. ANS: C PTS: 1 DIF: 1 REF: 14-1 TOP: Total revenue MSC: Analytical 10. 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. ANS: D PTS: 1 DIF: 1 REF: 14-1 TOP: Competitive markets MSC: Interpretive 11. 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. ANS: B PTS: 1 DIF: 1 REF: 14-1 TOP: Competitive markets MSC: Interpretive
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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. ANS: D PTS: 1 DIF: 1 REF: 14-1 TOP: Competitive markets MSC: Definitional 13. 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. ANS: A PTS: 1 DIF: 2 REF: 14-1 TOP: Competitive markets MSC: Interpretive
14. 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. ANS: A PTS: 1 DIF: 2 REF: 14-1 TOP: Competitive markets MSC: Interpretive 15. 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. ANS: A PTS: 1 DIF: 2 REF: 14-1 TOP: Competitive markets MSC: Interpretive 16. 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. ANS: D PTS: 1 DIF: 2 REF: 14-1 TOP: Competitive markets MSC: Interpretive
17. 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. ANS: B PTS: 1 DIF: 2 REF: 14-1 TOP: Competitive markets MSC: Interpretive 18. 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 ANS: C PTS: 1 DIF: 2 REF: 14-1 TOP: Marginal revenue MSC: Applicative
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19. 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 ANS: D PTS: 1 DIF: 2 REF: 14-1 TOP: Average revenue MSC: Applicative 20. 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. ANS: B PTS: 1 DIF: 1 REF: 14-1 TOP: Competitive firms MSC: Interpretive 21. 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. ANS: B PTS: 1 DIF: 1 REF: 14-1 TOP: Competitive markets MSC: Analytical 22. 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. ANS: A PTS: 1 DIF: 2 REF: 14-1 TOP: Total revenue MSC: Analytical 23. 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. ANS: B PTS: 1 DIF: 2 REF: 14-1 TOP: Economic profit MSC: Interpretive 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. ANS: B PTS: 1 DIF: 1 REF: 14-1 TOP: Implicit costs MSC: Interpretive 25. 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. ANS: D PTS: 1 DIF: 1 REF: 14-1 TOP: Accounting profit MSC: Interpretive
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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.
26. 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 ANS: A PTS: 1 DIF: 2 REF: 14-1 TOP: Economic profit MSC: Applicative 27. 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 ANS: D PTS: 1 DIF: 2 REF: 14-1 TOP: Opportunity cost MSC: Applicative
28. 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 ANS: C PTS: 1 DIF: 2 REF: 14-1 TOP: Economic profit MSC: Applicative 29. 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. ANS: B PTS: 1 DIF: 1 REF: 14-1 TOP: Competitive markets MSC: Interpretive 30. 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. ANS: A PTS: 1 DIF: 1 REF: 14-1 TOP: Competitive markets MSC: Interpretive
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. ANS: B PTS: 1 DIF: 2 REF: 14-1 TOP: Total revenue MSC: Analytical