Chapter 6
True or False
1. A profit-maximizing firm in a competitive market will increase production when average revenue exceeds
marginal cost. T
2. Because there are many buyers and sellers in a perfectly competitive market, no one seller can influence the
market price. T
3. In competitive markets, firms that raise their prices are typically rewarded with larger profits. F
4. When an individual firm in a competitive market increases its production, it is likely that the market price will
fall. F
5. In a competitive market, firms are unable to differentiate their product from that of other producers. T
6. Firms in a competitive market are said to be price takers because there are many sellers in the market and the
goods offered by the firms are very similar if not identical. T
7. A firm is currently producing 100 units of output per day. The manager reports to the owner that producing the
100th unit costs the firm $5. The firm can sell the 100th unit for $4.75. The firm should continue to produce 100
units in order to maximize its profits (or minimize its losses). F
8. A popular resort restaurant will maximize profits if it chooses to stay open during the less-crowded “off season”
when its total revenues exceed its variable costs. T
9. A firm operating in a perfectly competitive industry will continue to operate in the short run but earn losses if the
market price is less than that firm’s average variable cost. F
10. The supply curve of a firm in a competitive market is the average variable cost curve above the minimum of
marginal cost. F
777.
Multiple choices
1.
2.
3.
4.
5.
A firm has market power if it can
a. maximize profits.
b. minimize costs.
c. influence the market price of the good it sells.
d. hire as many workers as it needs at the prevailing wage rate.
2. The analysis of competitive firms sheds light on the decisions that lie behind the
a. demand curve.
b. supply curve.
c. way firms make pricing decisions in the not-for-profit sector of the economy.
d. way financial markets set interest rates.
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.
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.
Who is a price taker in a competitive market?
a. buyers only
b. sellers only
c. both buyers and sellers
d. neither buyers nor sellers
6. Competitive markets are characterized by
a. a small number of buyers and sellers.
b. unique products.
c. the interdependence of firms.
d. free entry and exit by firms.
7. 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.
8. 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.
9. 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
10. 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.
Quantity
Produced
0
1
2
3
4
5
6
7
8
COSTS
Total
Cost
$100
$150
$202
$257
$317
$385
$465
$562
$682
Marginal
Cost
--
Quantity
Demanded
0
1
2
3
4
5
6
7
8
REVENUES
Total
Price
Revenue
$120
$120
$120
$120
$120
$120
$120
$120
$120
Marginal
Revenue
--
1.. What is the total revenue from selling 7 units?
a. $120
b. $490
c. $562
d. $840
2. What is the total revenue from selling 4 units?
a. $120
b. $257
c. $317
d. $480
3.
. What is the marginal revenue from selling the 3rd unit?
a. $55
b. $120
c. $137
d. $140
4.
What is the average revenue when 4 units are sold?
a. $60
b. $120
c. $125
d. $197
John’s Vineyard
Quantity
Produced
0
1
2
3
4
5
6
7
8
COSTS
Total
Cost
$0
$50
$102
$157
$217
$285
$365
$462
$582
Marginal
Cost
--
Quantity
Demanded
0
1
2
3
4
5
6
7
8
1. What is the marginal cost of the 5th unit?
a. $55
b. $60
c. $68
d. $80
2.. What is the marginal cost of the 8th unit?
a. $0
b. $72.75
c. $120
d. $502
3. What is the total revenue from selling 4 units?
a. $80
b. $137
c. $320
d. $480
REVENUES
Total
Price
Revenue
$80
$80
$80
$80
$80
$80
$80
$80
$80
Marginal
Revenue
--
4. What is the total revenue from selling 7 units?
a. $80
b. $382
c. $540
d. $560
5.
What is the marginal revenue from selling the 1st unit?
a. $30
b. $50
c. $80
d. $160
6. What is the marginal revenue from selling the 5th unit?
a. $12
b. $68
c. $80
d. $480
7. What is the average revenue when 4 units are sold?
a. $0
b. $68
c. $80
d. $400
8. At what quantity does John’s Vineyard maximize profits?
a. 3
b. 6
c. 7
d. 8
9. What is John’s Vineyard's economic profit at its profit-maximizing output level?
a. $25
b. $75
c. $115
d. $225