Chapter 14/Firms in Competitive Markets ? 939
12. Free entry means that
a. the government pays any entry costs for individual firms. 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.
ANS: B DIF: LOC: Perfect competition MSC: Interpretive
2 REF: 14-1 NAT: Analytic TOP: Competitive markets
13. Which of the following industries is most likely to exhibit the characteristic of free entry?
a. nuclear power
b. municipal water and sewer c. dairy farming d. airport security
ANS: C DIF: LOC: Perfect competition MSC: Interpretive
2 REF: 14-1 NAT: Analytic TOP: Competitive markets
14. 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 DIF: LOC: Perfect competition MSC: Definitional
1 REF: 14-1 NAT: Analytic TOP: Competitive markets
15. 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 DIF: LOC: Perfect competition MSC: Interpretive
2 REF: 14-1 NAT: Analytic TOP: Competitive markets
16. 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 DIF: LOC: Perfect competition MSC: Interpretive
2 REF: 14-1 NAT: Analytic TOP: Competitive markets
17. Why does a firm in a competitive industry charge the market price?
a. If a firm charges less than the market price, it loses potential revenue.
b. If a firm charges more than the market price, it loses all its customers to other firms. c. The firm can sell as many units of output as it want to at the market price. d. All of the above are correct.
ANS: D DIF: LOC: Perfect competition MSC: Interpretive
2 REF: 14-1 NAT: Analytic TOP: Competitive markets
940 ? Chapter 14/Firms in Competitive Markets
18. 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 DIF: LOC: Perfect competition MSC: Interpretive
2 REF: 14-1 NAT: Analytic TOP: Competitive markets
19. A competitive firm would benefit from charging a price below the market price because the firm would
achieve
a. higher average revenue. b. higher profits. c. lower total costs.
d. None of the above is correct.
ANS: D DIF: LOC: Perfect competition MSC: Interpretive
2 REF: 14-1 NAT: Analytic TOP: Competitive markets
20. Which of the following characteristics of competitive markets is 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.
b. c. d.
(i) and (ii) only (i) and (iii) only (ii) only
(i), (ii), and (iii)
2
REF: 14-1 NAT: Analytic TOP: Competitive markets
ANS: B DIF: LOC: Perfect competition 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 DIF: LOC: Perfect competition MSC: Analytical
2 REF: 14-1 NAT: Analytic TOP: Competitive markets
22. 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 DIF: LOC: Perfect competition MSC: Interpretive
2 REF: 14-1 NAT: Analytic TOP: Competitive markets
Chapter 14/Firms in Competitive Markets ? 941
23. In a competitive market,
a. no single buyer or seller can influence the price of the product. b. there are only a small number of sellers.
c. the goods offered by the different sellers are unique.
d. accounting profit is driven to zero as firms freely enter and exit the market.
ANS: A DIF: LOC: Perfect competition MSC: Interpretive
1 REF: 14-1 NAT: Analytic TOP: Competitive markets
24. Which of the following statements regarding a competitive market is not correct?
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.
ANS: B DIF: LOC: Perfect competition MSC: Interpretive
2 REF: 14-1 NAT: Analytic TOP: Competitive markets
25. Which of the following statements regarding a competitive market is not correct?
a. There are many buyers and many sellers in the market. b. Firms can freely enter or exit the market. c. Price equals average revenue. d. Price exceeds marginal revenue.
ANS: D DIF: LOC: Perfect competition MSC: Interpretive
2 REF: 14-1 NAT: Analytic TOP: Competitive markets
26. 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 similar product.
d. significant advertising by firms to promote their products.
ANS: C DIF: LOC: Perfect competition MSC: Definitional
2 REF: 14-1 NAT: Analytic TOP: Competitive markets
27. 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
ANS: A DIF: LOC: Perfect competition MSC: Applicative
1 REF: 14-1 NAT: Analytic TOP: Competitive markets
28. Firms that operate in perfectly competitive markets try to
a. maximize revenues. b. maximize profits.
c. equate marginal revenue with average total cost. d. Both b and c are correct.
ANS: B DIF: LOC: Perfect competition MSC: Interpretive
2 REF: 14-1 NAT: Analytic TOP: Competitive markets
942 ? Chapter 14/Firms in Competitive Markets Table 14-1 Quantity Total Revenue 0 $0 1 $7 2 $14 3 $21 4 $28 29. Refer to Table 14-1. For a firm operating in a competitive market, the price is a. $0. b. $7. c. $14. d. $21.
ANS: B DIF: LOC: Perfect competition MSC: Applicative
2 REF: 14-1 NAT: Analytic TOP: Competitive markets
30. Refer to Table 14-1. For a firm operating in a competitive market, the marginal revenue is
a. $0. b. $7. c. $14. d. $21.
ANS: B DIF: LOC: Perfect competition MSC: Applicative
2 REF: 14-1 NAT: Analytic TOP: Marginal revenue
31. Refer to Table 14-1. For a firm operating in a competitive market, the average revenue is
a. $21. b. $14. c. $7. d. $0.
ANS: C DIF: LOC: Perfect competition MSC: Applicative
2 REF: 14-1 NAT: Analytic TOP: Average revenue
Table 14-2 Quantity 0 1 2 3 4 5 6 7 8 9 Price $13 $13 $13 $13 $13 $13 $13 $13 $13 $13 32. Refer to Table 14-2. 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 DIF: LOC: Perfect competition MSC: Analytical
2 REF: 14-1 NAT: Analytic TOP: Competitive markets
Chapter 14/Firms in Competitive Markets ? 943
33. Refer to Table 14-2. 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 entire range of output.
ANS: D DIF: LOC: Perfect competition MSC: Analytical
2 REF: 14-1 NAT: Analytic TOP: Average revenue
34. Refer to Table 14-2. 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 entire range of output.
ANS: D DIF: LOC: Perfect competition MSC: Analytical
2 REF: 14-1 NAT: Analytic TOP: Marginal revenue
35. Refer to Table 14-2. 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 DIF: LOC: Perfect competition MSC: Applicative
2 REF: 14-1 NAT: Analytic TOP: Total revenue
36. Firms operating in competitive markets produce output levels where marginal revenue equals
a. price.
b. average revenue.
c. total revenue divided by output. d. All of the above are correct.
ANS: D DIF: LOC: Perfect competition MSC: Applicative
2 REF: 14-1 NAT: Analytic
TOP: Marginal revenue | Average revenue
37. For a competitive firm,
a. total revenue equals average revenue. b. total revenue equals marginal revenue. c. total cost equals marginal revenue.
d. average revenue equals marginal revenue.
ANS: D DIF: LOC: Perfect competition MSC: Definitional
1 REF: 14-1 NAT: Analytic
TOP: Marginal revenue | Average revenue
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)
2
REF: 14-1 NAT: Analytic
TOP: Marginal revenue | Average revenue
ANS: D DIF: LOC: Perfect competition MSC: Analytical