Practice Problems

Chapter 14: Firms in Competitive Markets

Principles of Microeconomics
Multiple Choice
Identify the choice that best completes the statement or answers the question.

1. 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. 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.

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3. Who is a price taker in a competitive market?

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a. buyers only

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b. sellers only

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c. both buyers and sellers
d. neither buyers nor sellers

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4. Because the goods offered for sale in a competitive market are largely the same,
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a. there will be few sellers in the market.
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b. there will be few buyers in the market.
c. only a few buyers will have market power.
d. sellers will have little reason to charge less than the going market price.
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5. When firms are said to be price takers, it implies that if a firm raises its price,
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a. buyers will go elsewhere.

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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.
6. In a competitive market, no single producer can influence the market price because
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a. many other sellers are offering a product that is essentially identical.

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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.
7. In a competitive market,
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a. no single buyer or seller can influence the price of the product.

b. there are only a small number of sellers.
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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.
8. Which of the following firms is the closest to being a perfectly competitive firm?
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a. a hot dog vendor in New York

b. Microsoft Corporation
c. Ford Motor Company
d. the campus bookstore

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 9. 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. i) only
b. iii) only
c. i) and ii) only
d. i), ii), and iii)
10. Which of the following statements is correct?
a. For all firms, marginal revenue equals the price of the good.
b. Only for competitive firms does average revenue equal the price of the good.
c. Marginal revenue can be calculated as total revenue divided by the quantity sold.
d. Only for competitive firms does average revenue equal marginal revenue.
11. For a firm in a perfectly competitive market, the price of the good is always
a. equal to marginal revenue.

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b. equal to total revenue.
c. greater than average revenue.

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d. equal to the firm’s efficient scale of output.

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12. Whenever a perfectly competitive firm chooses to change its level of output, its marginal revenue

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a. increases if MR < ATC and decreases if MR > ATC.
b. does not change.
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c. increases.
d. decreases.
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Table 14-3
The following table presents cost and revenue information for Soper’s Port Vineyard.
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COSTS REVENUES
Quantity Total Marginal Quantity Total Marginal
Produced Cost Cost Demanded Price Revenue Revenue
0 $100 -- 0 $120 --
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1 $150 1 $120
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2 $202 2 $120
3 $257 3 $120
4 $317 4 $120
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5 $385 5 $120
6 $465 6 $120
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7 $562 7 $120
8 $682 8 $120

13. Refer to Table 14-3. What is the total revenue from selling 4 units?
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a. $120
b. $257
c. $317
d. $480

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 14. Refer to Table 14-3. What is the average revenue when 4 units are sold?
a. $60
b. $120
c. $125
d. $197
15. At the profit-maximizing level of output,
a. marginal revenue equals average total cost.
b. marginal revenue equals average variable cost.
c. marginal revenue equals marginal cost.
d. average revenue equals average total cost.
16. Christopher is a professional tennis player who gives tennis lessons. The industry is competitive.
Christopher hires a business consultant to analyze his financial records. The consultant recommends that
Christopher give fewer tennis lessons. The consultant must have concluded that Christopher’s
a. total revenues exceed his total accounting costs.
b. marginal revenue exceeds his total cost.
c. marginal revenue exceeds his marginal cost.
d. marginal cost exceeds his marginal revenue.

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Table 14-4

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Quantity Total Revenue Total Cost
0 $0 $3

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1 $7 $5
2 rs e
$14 $8
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3 $21 $12
4 $28 $17
5 $35 $23
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6 $42 $30
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7 $49 $38
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17. Refer to Table 14-4. A firm operating in a competitive market and facing the total costs listed in the table
will not produce an output level beyond
a. 4 units.
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b. 5 units.
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c. 6 units.
d. 7 units.
18. Refer to Table 14-4. The firm will produce a quantity greater than 4 because at 4 units of output, marginal
cost
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a. is less than marginal revenue.

b. equals marginal revenue.
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c. is greater than marginal revenue.

d. is minimized.
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 Table 14-7
Marginal Marginal
Quantity Cost Revenue
12 $5 $9
13 $6 $9
14 $7 $9
15 $8 $9
16 $9 $9
17 $10 $9

19. Refer to Table 14-7. If the firm is currently producing 14 units, what would you advise the owners?
a. decrease quantity to 13 units
b. increase quantity to 17 units
c. continue to operate at 14 units
d. increase quantity to 16 units

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Figure 14-1

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Price
10 MC

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9 ATC

o.
8 AVC
7
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6 P1
5
P2
4
P3
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3
aC s

2 P4
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1 2 3 4 5 6 7 8 Quantity
ed d

20. Refer to Figure 14-1. If the market price is P1, in the short run, the perfectly competitive firm will earn
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a. positive economic profits.

b. negative economic profits but will try to remain open.
c. negative economic profits and will shut down.
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d. zero economic profits.

21. Refer to Figure 14-1. If the market price is P4, in the short run, the perfectly competitive firm will earn
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a. positive economic profits.

b. negative economic profits but will try to remain open.
c. negative economic profits and will shut down.
d. zero economic profits.
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 Figure 14-2
Price
19
18 MC
17
16
15
14
13
12
11
10 ATC
9
8
7
6
5
4
3
2
1

1 2 3 4 5 6 7 8 Quantity

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22. Refer to Figure 14-2. If the market price is $10, what is the firm’s short-run economic profit?

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a. $9

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b. $15

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c. $30

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d. $50

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23. Refer to Figure 14-2. The firm will earn zero economic profit if the market price is
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a. $0
b. $6
c. $7
d. $10
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24. A profit-maximizing firm will shut down in the short run when
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a. price is less than average variable cost.

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b. price is less than average total cost.

c. average revenue is greater than marginal cost.
d. average revenue is greater than average fixed cost.
25. The short-run supply curve for a firm in a perfectly competitive market is
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a. horizontal.
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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.
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 26. A firm in a competitive market has the following cost structure:

Output Total Costs

0 $1
1 $6
2 $9
3 $10
4 $17
5 $26

What is the lowest price at which this firm might choose to operate?
a. $2
b. $3
c. $4
d. $5

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Figure 14-6

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Price
F

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MC

o.
ATC

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D
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B C
aC s
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A
Quantity
ed d
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27. Refer to Figure 14-6. Which line segment best reflects the short-run supply curve for this firm?
a. ABCF
b. CD
c. DF
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d. BCD
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 Figure 14-9
Price Price
(a) MC (b) S0 S1

ATC
B
P2 P2
A C
P1 P1
D
P0 P0
D1
D0

Q1 Q2 Quantity QA QBQD QC Quantity

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28. 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

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a. have a zero economic profit.

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b. have a negative accounting profit.

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c. exit the market.

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d. choose to increase production to increase profit.
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29. 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
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at point C.
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c. rising prices and falling profits for existing firms in the market.
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d. falling prices and falling profits for existing firms in the market.
30. Refer to Figure 14-9. Assume that the market starts in equilibrium at point A in panel (b) and that panel (a)
illustrates the cost curves facing individual firms. Suppose that demand increases from D0 to D1. Which of
the following statements is correct?
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a. Points A, B, and C represent both short-run and long-run equilibria points.

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b. Points A, B, C, and D represent short-run equilibria points.

c. Points A and B represent long-run equilibria points.
d. Points A and C represent long-run equilibria points.
31. Refer to Figure 14-9. Assume that the market starts in equilibrium at point A in panel (b) and that panel (a)
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illustrates the cost curves facing individual firms. Suppose that demand increases from D0 to D1. Which of
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the following statements is not correct?

a. Point A is a long-run equilibrium point.
b. Points A, B, and C are short-run equilibria points.
c. Point B is a long-run equilibrium point.
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d. Point C is a long-run equilibrium point.

32. 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).
7

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 d. lower prices once the new long-run equilibrium is reached.
33. Refer to Figure 14-9. Suppose a firm in a competitive market, like the one depicted in panel (a), observes
market price rising from P1 to P2. Which of the following could explain this observation?
a. The entry of new firms into the market.
b. The exit of existing consumers from the market.
c. An increase in market supply from S0 to S1.
d. An increase in market demand from D0 to D1.

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co
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o.
rs e
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o
aC s
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ed d
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 HW_Ch14
Answer Section

MULTIPLE CHOICE

1. C
2. C
3. C
4. D
5. A
6. A
7. A
8. A
9. D
10. D

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11. A

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12. B

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13. D

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14. B

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15. C
16. D
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17. C
18. A
19. D
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20. A
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21. C
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22. B
23. B
24. A
25. D
ed d

26. B
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27. A
28. A
29. B
30. D
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31. C
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32. B
33. D
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