What is a Competitive Market

2 ❖ Chapter 14/Firms in Competitive Markets WHAT IS A COMPETITIVE MARKET? 1. A key characteristic of a competitive market is that a. b. c. d. government antitrust laws regulate competition. producers sell nearly identical products. firms minimize total costs. firms have price setting power. ANS: B PTS: 1 DIF: 1 NAT: Analytic LOC: Perfect competition MSC: Definitional REF: 14-1 TOP: Competitive markets 2. Which of the following is not a characteristic of a competitive market? a. b. c. d. Buyers and sellers are price takers. Each firm sells a virtually identical product. Entry is limited. Each firm chooses an output level that maximizes profits. ANS: C PTS: 1 DIF: 2 NAT: Analytic LOC: Perfect competition MSC: Definitional REF: 14-1 TOP: Competitive markets 3. Which of the following is a characteristic of a competitive market? a. b. c. d. There are many buyers but few sellers. Firms sell differentiated products. There are many barriers to entry. Buyers and sellers are price takers. ANS: D PTS: 1 DIF: NAT: Analytic LOC: Perfect competition MSC: Definitional 2 REF: 14-1 TOP: Competitive markets 1 REF: 14-1 TOP: Competitive markets 4. Who is a price taker in a competitive market? a. b. c. d. buyers only sellers only both buyers and sellers neither buyers nor sellers ANS: C PTS: 1 DIF: NAT: Analytic LOC: Perfect competition MSC: Definitional Chapter 14/Firms in Competitive Markets ❖ 3 5. Competitive markets are characterized by a. b. c. d. a small number of buyers and sellers. unique products. the interdependence of firms. free entry and exit by firms. ANS: D PTS: 1 DIF: NAT: Analytic LOC: Perfect competition MSC: Definitional 1 REF: 14-1 TOP: Competitive markets 6. 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. (i), (ii), and (iii) ANS: C PTS: 1 DIF: 2 NAT: Analytic LOC: Perfect competition MSC: Interpretive REF: 14-1 TOP: Competitive markets 7. A firm that has little ability to influence market prices operates in a a. b. c. d. competitive market. strategic market. thin market. power market. ANS: A PTS: 1 DIF: NAT: Analytic LOC: Perfect competition MSC: Definitional 1 REF: 14-1 TOP: Competitive markets 8. In a competitive market, the actions of any single buyer or seller will a. b. c. d. have a negligible impact on the market price. have little effect on market equilibrium quantity but will affect market equilibrium price. affect marginal revenue and average revenue but not price. adversely affect the profitability of more than one firm in the market. ANS: A PTS: 1 DIF: 2 REF: 14-1 NAT: Analytic LOC: Perfect competition TOP: Competitive markets MSC: Interpretive 9. In a competitive market, the actions of any single buyer or seller will a. b. c. d. discourage entry by competitors. influence the profits of other firms in the market. have a negligible impact on the market price. None of the above is correct. ANS: C PTS: 1 DIF: 2 NAT: Analytic LOC: Perfect competition MSC: Interpretive REF: 14-1 TOP: Competitive markets 4 ❖ Chapter 14/Firms in Competitive Markets 10. Because the goods offered for sale in a competitive market are largely the same, a. b. c. d. there will be few sellers in the market. there will be few buyers in the market. only a few buyers will have market power. sellers will have little reason to charge less than the going market price. ANS: D PTS: 1 DIF: 2 REF: 14-1 NAT: Analytic LOC: Perfect competition TOP: Competitive markets MSC: Interpretive 11. Which of the following is not a characteristic of a perfectly competitive market? a. b. c. d. Firms are price takers. Firms have difficulty entering the market. There are many sellers in the market. Goods offered for sale are largely the same. ANS: B PTS: 1 DIF: NAT: Analytic LOC: Perfect competition MSC: Interpretive 2 REF: 14-1 TOP: Competitive markets 12. Which of the following is not a characteristic of a perfectly competitive market? a. b. c. d. Firms are price takers. Firms can freely enter the market. Many firms have market power. Goods offered for sale are largely the same. ANS: C PTS: 1 DIF: NAT: Analytic LOC: Perfect competition MSC: Interpretive 2 REF: 14-1 TOP: Competitive markets 13. Free entry means that a. b. c. d. the government pays any entry costs for individual firms. no legal barriers prevent a firm from entering an industry. a firm's marginal cost is zero. a firm has no fixed costs in the short run. ANS: B PTS: 1 DIF: 2 NAT: Analytic LOC: Perfect competition MSC: Interpretive REF: 14-1 TOP: Competitive markets 14. Which of the following industries is most likely to exhibit the characteristic of free entry? a. b. c. d. nuclear power municipal water and sewer dairy farming airport security ANS: C PTS: 1 DIF: NAT: Analytic LOC: Perfect competition MSC: Applicative 2 REF: 14-1 TOP: Competitive markets 15. Which of the following industries is most likely to exhibit the characteristic of free entry? a. b. c. d. cable television satellite radio mineral mining t-shirt silkscreening ANS: D PTS: 1 DIF: NAT: Analytic LOC: Perfect competition MSC: Applicative 2 REF: 14-1 TOP: Competitive markets Chapter 14/Firms in Competitive Markets ❖ 5 16. Which of the following industries is least likely to exhibit the characteristic of free entry? a. b. c. d. restaurants municipal water and sewer soybean farming selling running apparel ANS: B PTS: 1 DIF: NAT: Analytic LOC: Perfect competition MSC: Applicative 2 REF: 14-1 TOP: Competitive markets 17. Which of the following industries is least likely to exhibit the characteristic of free entry? a. b. c. d. selling running apparel wheat farming yoga studios satellite radio ANS: D PTS: 1 DIF: NAT: Analytic LOC: Perfect competition MSC: Applicative 2 REF: 14-1 TOP: Competitive markets 18. When buyers in a competitive market take the selling price as given, they are said to be a. b. c. d. market entrants. monopolists. free riders. price takers. ANS: D PTS: 1 DIF: NAT: Analytic LOC: Perfect competition MSC: Definitional 1 REF: 14-1 TOP: Competitive markets 19. When firms are said to be price takers, it implies that if a firm raises its price, a. b. c. d. buyers will go elsewhere. buyers will pay the higher price in the short run. competitors will also raise their prices. firms in the industry will exercise market power. ANS: A PTS: 1 DIF: 2 NAT: Analytic LOC: Perfect competition MSC: Interpretive REF: 14-1 TOP: Competitive markets 20. Which of the following statements best reflects a price-taking firm? a. b. c. If the firm were to charge more than the going price, it would sell none of its goods. The firm has an incentive to charge less than the market price to earn higher revenue. 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 NAT: Analytic LOC: Perfect competition TOP: Competitive markets MSC: Interpretive 21. Why does a firm in a competitive industry charge the market price? a. b. c. d. If a firm charges less than the market price, it loses potential revenue. If a firm charges more than the market price, it loses all its customers to other firms. The firm can sell as many units of output as it wants to at the market price. All of the above are correct. ANS: D PTS: 1 DIF: 2 REF: 14-1 NAT: Analytic LOC: Perfect competition TOP: Competitive markets MSC: Interpretive 6 ❖ Chapter 14/Firms in Competitive Markets 22. In a competitive market, no single producer can influence the market price because a. b. c. d. many other sellers are offering a product that is essentially identical. consumers have more influence over the market price than producers do. government intervention prevents firms from influencing price. producers agree not to change the price. ANS: A PTS: 1 DIF: 2 REF: 14-1 NAT: Analytic LOC: Perfect competition TOP: Competitive markets MSC: Interpretive 23. A competitive firm would benefit from charging a price below the market price because the firm would achieve (i) higher average revenue. (ii) higher profits. (iii) lower total costs. a. (i) only b. (ii) and (iii) only c. (i), (ii), and (iii) d. None of the above is correct. ANS: D PTS: 1 DIF: NAT: Analytic LOC: Perfect competition MSC: Interpretive 2 REF: 14-1 TOP: Competitive markets 24. 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. (i) and (ii) only b. (i) and (iii) only c. (ii) only d. (i), (ii), and (iii) ANS: B PTS: 1 DIF: 2 NAT: Analytic LOC: Perfect competition MSC: Interpretive REF: 14-1 TOP: Competitive markets 25. 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. b. c. d. increase. remain unchanged. decrease by less than 20 percent. decrease by more than 20 percent. ANS: B PTS: 1 DIF: NAT: Analytic LOC: Perfect competition MSC: Analytical 2 REF: 14-1 TOP: Competitive markets 26. The Doris Dairy Farm sells milk to a dairy broker in Prairie du Chien, Wisconsin. Because the market for milk is generally considered to be competitive, the Doris Dairy Farm does not a. b. c. d. choose the quantity of milk to produce. choose the price at which it sells its milk. have any fixed costs of production. set marginal revenue equal to marginal cost to maximize profit. ANS: B PTS: 1 DIF: 2 REF: 14-1 NAT: Analytic LOC: Perfect competition TOP: Competitive markets MSC: Interpretive Chapter 14/Firms in Competitive Markets ❖ 7 27. The Doris Dairy Farm sells milk to a dairy broker in Prairie du Chien, Wisconsin. Because the market for milk is generally considered to be competitive, the Doris Dairy Farm does not choose the a. b. c. d. quantity of milk to produce. price at which it sells its milk. profits it earns. All of the above are correct. ANS: B PTS: 1 DIF: NAT: Analytic LOC: Perfect competition MSC: Interpretive 2 REF: 14-1 TOP: Competitive markets 28. In a competitive market, a. b. c. d. no single buyer or seller can influence the price of the product. there are only a small number of sellers. the goods offered by the different sellers are unique. accounting profit is driven to zero as firms freely enter and exit the market. ANS: A PTS: 1 DIF: 1 REF: 14-1 NAT: Analytic LOC: Perfect competition TOP: Competitive markets MSC: Interpretive 29. Which of the following statements regarding a competitive market is not correct? a. b. There are many buyers and many sellers in the market. 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 PTS: 1 DIF: 2 REF: 14-1 NAT: Analytic LOC: Perfect competition TOP: Competitive markets MSC: Interpretive 30. Which of the following statements regarding a competitive market is not correct? a. b. c. d. There are many buyers and many sellers in the market. Firms can freely enter or exit the market. Price equals average revenue. Price exceeds marginal revenue. ANS: D PTS: 1 DIF: 2 NAT: Analytic LOC: Perfect competition MSC: Interpretive REF: 14-1 TOP: Competitive markets 31. One of the defining characteristics of a perfectly competitive market is a. b. c. d. a small number of sellers. a large number of buyers and a small number of sellers. a similar product. significant advertising by firms to promote their products. ANS: C PTS: 1 DIF: 2 NAT: Analytic LOC: Perfect competition MSC: Definitional REF: 14-1 TOP: Competitive markets 32. Which of the following firms is the closest to being a perfectly competitive firm? a. b. c. d. a hot dog vendor in New York Microsoft Corporation Ford Motor Company the campus bookstore ANS: A PTS: 1 DIF: NAT: Analytic LOC: Perfect competition MSC: Applicative 1 REF: 14-1 TOP: Competitive markets 8 ❖ Chapter 14/Firms in Competitive Markets 33. Which of the following firms is the closest to being a perfectly competitive firm? a. b. c. d. the New York Yankees Apple, Inc. DeBeers diamond wholesalers a wheat farmer in Kansas ANS: D PTS: 1 DIF: NAT: Analytic LOC: Perfect competition MSC: Applicative 1 REF: 14-1 TOP: Competitive markets 34. Firms that operate in perfectly competitive markets try to a. b. c. d. maximize revenues. maximize profits. equate marginal revenue with average total cost. All of the above are correct. ANS: B PTS: 1 DIF: 2 NAT: Analytic LOC: Perfect competition MSC: Interpretive REF: 14-1 TOP: Competitive markets 35. A seller in a competitive market can a. b. c. d. sell all he wants at the going price, so he has little reason to charge less. influence the market price by adjusting his output. influence the profits earned by competing firms by adjusting his output. All of the above are correct. ANS: A PTS: 1 DIF: 1 REF: 14-1 NAT: Analytic LOC: Perfect competition TOP: Competitive markets MSC: Interpretive 36. A seller in a competitive market a. b. c. d. can sell all he wants at the going price, so he has little reason to charge less. will lose all his customers to other sellers if he raises his price. considers the market price to be a “take it or leave it” price. All of the above are correct. ANS: D PTS: 1 DIF: 1 REF: 14-1 NAT: Analytic LOC: Perfect competition TOP: Competitive markets MSC: Interpretive 37. In a perfectly competitive market, a. b. c. d. no one seller can influence the price of the product. price exceeds marginal revenue for each unit sold. average revenue exceeds marginal revenue for each unit sold. All of the above are correct. ANS: A PTS: 1 DIF: 2 REF: 14-1 NAT: Analytic LOC: Perfect competition TOP: Competitive markets MSC: Interpretive 38. For a firm in a competitive market, an increase in the quantity produced by the firm will result in a. b. c. d. a decrease in the product’s market price. an increase in the product’s market price. no change in the product’s market price. either an increase or no change in the product’s market price depending on the number of firms in the market. ANS: C PTS: 1 DIF: 2 REF: 14-1 NAT: Analytic LOC: Perfect competition TOP: Competitive markets MSC: Interpretive Chapter 14/Firms in Competitive Markets ❖ 9 39. If Cathy’s Coffee Emporium sells its product in a competitive market, then a. the price of that product depends on the quantity of the product that Cathy’s Coffee Emporium produces and sells because Cathy’s Coffee Emporium’s demand curve is downward sloping. Cathy’s Coffee Emporium's total revenue must be proportional to its quantity of output. Cathy’s Coffee Emporium's total cost must be a constant multiple of its quantity of output. Cathy’s Coffee Emporium's total revenue must be equal to its average revenue. ANS: B PTS: 1 DIF: 3 REF: 14-1 NAT: Analytic LOC: Perfect competition TOP: Total revenue MSC: Analytical b. c. d. 40. Changes in the output of a perfectly competitive firm, without any change in the price of the product, will change the firm's a. b. c. d. total revenue. marginal revenue. average revenue. All of the above are correct. ANS: A PTS: 1 DIF: NAT: Analytic LOC: Perfect competition MSC: Analytical 2 REF: 14-1 TOP: Total revenue 41. If a firm in a perfectly competitive market triples the quantity of output sold, then total revenue will a. b. c. d. more than triple. less than triple. exactly triple. Any of the above may be true depending on the firm’s labor productivity. ANS: C PTS: 1 DIF: 2 REF: 14-1 NAT: Analytic LOC: Perfect competition TOP: Total revenue MSC: Analytical 42. When a competitive firm doubles the quantity of output it sells, its a. b. c. d. total revenue doubles. average revenue doubles. marginal revenue doubles. profits must increase. ANS: A PTS: 1 DIF: NAT: Analytic LOC: Perfect competition MSC: Analytical 2 REF: 14-1 TOP: Total revenue 43. If a firm in a competitive market doubles its number of units sold, total revenue for the firm will a. b. c. d. more than double. double. increase but by less than double. may increase or decrease depending on the price elasticity of demand. ANS: B PTS: 1 DIF: 2 REF: 14-1 NAT: Analytic LOC: Perfect competition TOP: Total revenue MSC: Analytical 10 ❖ Chapter 14/Firms in Competitive Markets Table 14-1 Quantity 0 1 2 3 4 5 6 7 8 9 Price $5 $5 $5 $5 $5 $5 $5 $5 $5 $5 44. Refer to Table 14-1. The price and quantity relationship in the table is most likely a demand curve faced by a firm in a a. b. c. d. monopoly. concentrated market. competitive market. strategic market. ANS: C PTS: 1 DIF: NAT: Analytic LOC: Perfect competition MSC: Analytical 2 REF: 14-1 TOP: Competitive markets 45. Refer to Table 14-1. Over which range of output is average revenue equal to price? a. b. c. d. 1 to 5 units 3 to 7 units 5 to 9 units Average revenue is equal to price over the entire range of output. ANS: D PTS: 1 DIF: 2 REF: 14-1 NAT: Analytic LOC: Perfect competition TOP: Average revenue MSC: Analytical 46. Refer to Table 14-1. Over what range of output is marginal revenue declining? a. b. c. d. 1 to 6 units 3 to 7 units 7 to 9 units Marginal revenue is constant over the entire range of output. ANS: D PTS: 1 DIF: 2 REF: 14-1 NAT: Analytic LOC: Perfect competition TOP: Marginal revenue MSC: Analytical 47. Refer to Table 14-1. If the firm doubles its output from 3 to 6 units, total revenue will a. b. c. d. increase by less than $15. increase by exactly $15. increase by more than $15. Total revenue cannot be determined from the information provided. ANS: B PTS: 1 DIF: 2 REF: 14-1 NAT: Analytic LOC: Perfect competition TOP: Total revenue MSC: Applicative Chapter 14/Firms in Competitive Markets ❖ 11 Table 14-2 The table represents a demand curve faced by a firm in a competitive market. Price $4 $4 $4 $4 $4 $4 Quantity 0 1 2 3 4 5 48. Refer to Table 14-2. A firm operating in a competitive market maximizes total revenue by producing a. b. c. d. 2 units. 3 units. 4 units. as many units as possible. ANS: D PTS: 1 DIF: NAT: Analytic LOC: Perfect competition MSC: Applicative 2 REF: 14-1 TOP: Total revenue 49. Refer to Table 14-2. For a firm operating in a competitive market, the average revenue from selling 3 units is a. b. c. d. $12. $4. $3. $1.25. ANS: B NAT: Analytic MSC: Applicative PTS: 1 DIF: LOC: Perfect competition 2 REF: 14-1 TOP: Average revenue 50. Refer to Table 14-2. For a firm operating in a competitive market, the marginal revenue from selling the 3rd unit is a. b. c. d. $12. $4. $3. $1.25. ANS: B NAT: Analytic MSC: Applicative PTS: 1 DIF: LOC: Perfect competition 3 REF: 14-1 TOP: Marginal revenue Table 14-3 Quantity 0 1 2 3 4 Total Revenue $0 $7 $14 $21 $28 51. Refer to Table 14-3. For a firm operating in a competitive market, the price is a. b. c. d. $0. $7. $14. $21. ANS: B NAT: Analytic MSC: Applicative PTS: 1 DIF: LOC: Perfect competition 2 REF: 14-1 TOP: Competitive markets 12 ❖ Chapter 14/Firms in Competitive Markets 52. Refer to Table 14-3. For a firm operating in a competitive market, the marginal revenue is a. b. c. d. $0. $7. $14. $21. ANS: B NAT: Analytic MSC: Applicative PTS: 1 DIF: LOC: Perfect competition 2 REF: 14-1 TOP: Marginal revenue 53. Refer to Table 14-3. For a firm operating in a competitive market, the average revenue is a. b. c. d. $21. $14. $7. $0. ANS: C NAT: Analytic MSC: Applicative PTS: 1 DIF: LOC: Perfect competition 2 REF: 14-1 TOP: Average revenue Table 14-4 Quantity 0 1 2 3 4 Total Revenue $0 $15 $30 $45 $60 54. Refer to Table 14-4. For a firm operating in a competitive market, the price is a. b. c. d. $45. $30. $15. $0. ANS: C NAT: Analytic MSC: Applicative PTS: 1 DIF: LOC: Perfect competition 2 REF: 14-1 TOP: Competitive markets 55. Refer to Table 14-4. For a firm operating in a competitive market, the marginal revenue is a. b. c. d. $45. $30. $15. $0. ANS: C NAT: Analytic MSC: Applicative PTS: 1 DIF: LOC: Perfect competition 2 REF: 14-1 TOP: Marginal revenue 56. Refer to Table 14-4. For a firm operating in a competitive market, the average revenue is a. b. c. d. $45. $30. $15. $0. ANS: C NAT: Analytic MSC: Applicative PTS: 1 DIF: LOC: Perfect competition 2 REF: 14-1 TOP: Average revenue Chapter 14/Firms in Competitive Markets ❖ 13 Table 14-5 Quantity 12 13 14 15 16 Total Revenue $132 $143 $154 $165 $176 57. Refer to Table 14-5. The price of the product is a. b. c. d. $9. $11. $13. $15. ANS: B NAT: Analytic MSC: Applicative PTS: 1 DIF: LOC: Perfect competition 1 REF: 14-1 TOP: Competitive markets 58. Refer to Table 14-5. The average revenue when 14 units are produced and sold is a. b. c. d. $9. $11. $13. $15. ANS: B NAT: Analytic MSC: Analytical PTS: 1 DIF: LOC: Perfect competition 1 REF: 14-1 TOP: Average revenue 59. Refer to Table 14-5. The marginal revenue of the 12th unit is a. b. c. d. $9. $10. $11 The marginal revenue cannot be determined without knowing the total revenue when 11 units are sold. ANS: C PTS: 1 DIF: 2 REF: 14-1 NAT: Analytic LOC: Perfect competition TOP: Marginal revenue MSC: Analytical 14 ❖ Chapter 14/Firms in Competitive Markets Table 14-6 The following table presents cost and revenue information for a firm operating in a competitive industry. 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 Price Total Revenue $120 $120 $120 $120 $120 $120 $120 $120 $120 60. Refer to Table 14-6. What is the total revenue from selling 7 units? a. b. c. d. $120 $490 $562 $840 ANS: D NAT: Analytic MSC: Applicative PTS: 1 DIF: LOC: Perfect competition 2 REF: 14-1 TOP: Total revenue 61. Refer to Table 14-6. What is the total revenue from selling 4 units? a. b. c. d. $120 $257 $317 $480 ANS: D NAT: Analytic MSC: Applicative PTS: 1 DIF: LOC: Perfect competition 2 REF: 14-1 TOP: Total revenue 62. Refer to Table 14-6. What is the marginal revenue from selling the 3rd unit? a. b. c. d. $55 $120 $137 $140 ANS: B NAT: Analytic MSC: Applicative PTS: 1 DIF: LOC: Perfect competition 2 REF: 14-1 TOP: Marginal revenue 63. Refer to Table 14-6. What is the average revenue when 4 units are sold? a. b. c. d. $60 $120 $125 $197 ANS: B NAT: Analytic MSC: Applicative PTS: 1 DIF: LOC: Perfect competition 2 REF: 14-1 TOP: Average revenue Marginal Revenue -- Chapter 14/Firms in Competitive Markets ❖ 15 64. Which of the following statements is correct? a. b. c. d. For all firms, marginal revenue equals the price of the good. Only for competitive firms does average revenue equal the price of the good. Marginal revenue can be calculated as total revenue divided by the quantity sold. Only for competitive firms does average revenue equal marginal revenue. ANS: D PTS: 1 DIF: 3 REF: 14-1 NAT: Analytic LOC: Perfect competition TOP: Average revenue | Marginal revenue MSC: Interpretive 65. Suppose a firm in a competitive market earned $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. b. c. d. $5 and 50 units $5 and 100 units $10 and 50 units $10 and 100 units ANS: D PTS: 1 DIF: NAT: Analytic LOC: Perfect competition MSC: Applicative 2 REF: 14-1 TOP: Average revenue 66. Which of the following statements regarding a competitive firm is correct? a. Because demand is downward sloping, if a firm increases its level of output, the firm will have to charge a lower price to sell the additional output. b. If a firm raises its price, the firm may be able to increase its total revenue even though it will sell fewer units. c. By lowering its price below the market price, the firm will benefit from selling more units at the lower price than it could have sold by charging the market price. d. For all firms, average revenue equals the price of the good. ANS: D PTS: 1 DIF: 2 REF: 14-1 NAT: Analytic LOC: Perfect competition TOP: Average revenue MSC: Analytical 67. Suppose a firm in a competitive market produces and sells 150 units of output and earns $1,800 in total revenue from the sales. If the firm increases its output to 200 units, the average revenue of the 200th unit will be a. b. c. d. less than $12. more than $12. $12. Any of the above may be correct depending on the price elasticity of demand for the product. ANS: C PTS: 1 DIF: 2 REF: 14-1 NAT: Analytic LOC: Perfect competition TOP: Average revenue MSC: Analytical 68. Suppose a firm in a competitive market produces and sells 150 units of output and earns $1,800 in total revenue from the sales. If the firm increases its output to 200 units, total revenue will be a. b. c. d. $2,000. $2,400. $4,200. We do not have enough information to answer the question. ANS: B PTS: 1 DIF: 2 NAT: Analytic LOC: Perfect competition MSC: Analytical REF: 14-1 TOP: Total revenue 16 ❖ Chapter 14/Firms in Competitive Markets 69. Firms operating in competitive markets produce output levels where marginal revenue equals a. b. c. d. price. average revenue. total revenue divided by output. All of the above are correct. ANS: D PTS: 1 DIF: NAT: Analytic LOC: Perfect competition TOP: Marginal revenue | Average revenue 2 REF: 14-1 MSC: Applicative 1 REF: MSC: Definitional 70. For a competitive firm, a. b. c. d. total revenue equals average revenue. total revenue equals marginal revenue. total cost equals marginal revenue. average revenue equals marginal revenue. ANS: D PTS: 1 DIF: NAT: Analytic LOC: Perfect competition TOP: Marginal revenue | Average revenue 14-1 71. 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) ANS: D PTS: 1 DIF: NAT: Analytic LOC: Perfect competition TOP: Marginal revenue | Average revenue 2 REF: MSC: Analytical 14-1 72. Suppose that a firm operating in perfectly competitive market sells 200 units of output at a price of $3 each. Which of the following statements is correct? (i) Marginal revenue equals $3. (ii) Average revenue equals $600. (iii) Average revenue exceeds marginal revenue, but we don’t know by how much. a. (i) only b. (iii) only c. (i) and (ii) only d. (i), (ii), and (iii) ANS: A PTS: 1 DIF: 2 REF: 14-1 NAT: Analytic LOC: Perfect competition TOP: Marginal revenue | Average revenue MSC: Analytical 73. Suppose that a firm operating in perfectly competitive market sells 300 units of output at a price of $3 each. Which of the following statements is correct? (i) Marginal revenue equals $3. (ii) Average revenue equals $100. (iii) Total revenue equals $300. a. (i) only b. (iii) only c. (i) and (ii) only d. (i), (ii), and (iii) Chapter 14/Firms in Competitive Markets ❖ 17 ANS: A PTS: 1 DIF: NAT: Analytic LOC: Perfect competition TOP: Marginal revenue | Average revenue 2 REF: 14-1 MSC: Analytical 74. Suppose that a firm operating in perfectly competitive market sells 400 units of output at a price of $4 each. Which of the following statements is correct? (i) Marginal revenue equals $4. (ii) Average revenue equals $100. (iii) Total revenue equals $1,600. a. (i) only b. (iii) only c. (i) and (iii) only d. (i), (ii), and (iii) ANS: C PTS: 1 DIF: NAT: Analytic LOC: Perfect competition TOP: Marginal revenue | Average revenue 2 REF: 14-1 MSC: Analytical 75. For a firm operating in a competitive industry, which of the following statements is not correct? a. b. c. d. Price equals average revenue. Price equals marginal revenue. Total revenue is constant. Marginal revenue is constant. ANS: C PTS: 1 DIF: NAT: Analytic LOC: Perfect competition TOP: Marginal revenue | Average revenue 2 REF: 14-1 MSC: Interpretive 76. For a firm in a perfectly competitive market, the price of the good is always a. b. c. d. equal to marginal revenue. equal to total revenue. greater than average revenue. equal to the firm’s efficient scale of output. ANS: A PTS: 1 DIF: NAT: Analytic LOC: Perfect competition MSC: Interpretive 1 REF: 14-1 TOP: Marginal revenue 77. 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. b. c. d. $4 $8 $32 $64 ANS: C NAT: Analytic MSC: Applicative PTS: 1 DIF: LOC: Perfect competition 2 REF: 14-1 TOP: Marginal revenue 78. Whenever a perfectly competitive firm chooses to change its level of output, its marginal revenue a. b. c. d. increases if MR < ATC and decreases if MR > ATC. does not change. increases. decreases. ANS: B PTS: 1 DIF: 1 NAT: Analytic LOC: Perfect competition MSC: Interpretive REF: 14-1 TOP: Marginal revenue 18 ❖ Chapter 14/Firms in Competitive Markets 79. Suppose that in a competitive market the equilibrium price is $2.50. What is marginal revenue for the last unit sold by the typical firm in this market? a. b. c. d. less than $2.50 more than $2.50 exactly $2.50 The marginal revenue cannot be determined without knowing the actual quantity sold by the typical firm. ANS: C PTS: 1 DIF: 1 REF: 14-1 NAT: Analytic LOC: Perfect competition TOP: Marginal revenue MSC: Interpretive 80. For an individual firm operating in a competitive market, marginal revenue equals a. b. c. d. average revenue and the price for all levels of output. average revenue, which is greater than the price for all levels of output. average revenue, the price, and marginal cost for all levels of output. marginal cost, which is greater than average revenue for all levels of output. ANS: A PTS: 1 DIF: 2 REF: 14-1 NAT: Analytic LOC: Perfect competition TOP: Marginal revenue | Average revenue MSC: Interpretive 81. If the market elasticity of demand for potatoes is -0.3 in a perfectly competitive market, then the individual farmer's elasticity of demand a. b. c. d. will also be -0.3. depends on how large a crop the farmer produces. will range between -0.3 and -1.0. will be infinite. ANS: D PTS: 1 DIF: 3 NAT: Analytic LOC: Perfect competition MSC: Analytical REF: 14-1 TOP: Elasticity