Deck 14: Firms in Competitive Markets

Question 1

If a price-taking firm doubles its output, it will also double its revenue.

Answer 1

True

Question 2

In a competitive market, firms that increase prices experience increases in sales.

Answer 2

False

Question 3

One of the important characteristics of a perfectly competitive market is that there are many buyers and sellers.

Answer 3

True

Question 4

If, at a given output, the marginal cost curve lies below the marginal revenue curve but above the average total cost curve, then the firm can increase its profit by decreasing output.

Question 5

The long-run equilibrium in a competitive market characterised by firms with identical costs is generally characterised by firms operating at efficient scale.

Question 6

In a competitive market, individual buyers and sellers have little ability to influence price.

Question 7

The supply curve of a firm in a competitive market is equal to average variable cost, above the minimum of marginal cost.

Question 8

If it is optimal for a firm to exit in the short-run, then it will also be optimal for the firm to exit in the long-run, all else equal.

Question 9

Assume the market for lawn mowing is competitive.If a firm has no fixed costs and constant marginal costs, then a doubling of output will lead to a doubling of total revenue.

Question 10

It is not possible for the marginal firm in a competitive market to make an economic profit in the long-run.

Question 11

To maximise profit, a firm should operate at the minimum of average total cost.

Question 12

The firm's short-run supply curve is the marginal cost curve above average total cost.

Question 13

By comparing the marginal revenue and marginal cost from each unit produced, a firm in a competitive market can determine the profit-maximising level of production.

Question 14

A firm in a competitive market will maximise profit when the level of production is such that marginal cost equals price.

Question 15

If a seller is a price taker, they will be able to sell all the quantity they want at the market price.

Question 16

It is possible for firms in a competitive market to earn positive accounting profits in the long-run.

Question 17

The market's short-run supply curve will be steeper than an individual firm's supply curve.

Question 18

If price is less than marginal cost, then it is optimal for a firm to shut down.

Question 19

When individual firms in competitive markets increase their production, it is likely that market price will fall.

Question 20

In a competitive market, marginal revenue will only sometimes equal average revenue.

Question 21

All of the following conditions are consistent with a firm's decision to shut down:
TR < VC, TR/Q < VC/Q, and P < MR.(TR = total revenue, VC = variable cost, Q = level of production, P = price and MR = marginal revenue.)

Question 22

In the long run, a competitive market with 1000 identical firms will experience an equilibrium price equal to the minimum of each firm's average total cost.

Question 23

If a firm in a competitive market sells 25 per cent less, then its total revenue will fall by 25 per cent.

Question 24

When a firm experiences zero-profit equilibrium, the firm's revenue must be sufficient to cover all opportunity costs.

Question 25

The long run supply curve for a perfectly competitive firm is the segment of the marginal cost curve that lies above the average total cost curve.

Question 26

New firms will enter the market when profit-maximising firms in competitive markets are earning profits.

Question 27

Marginal adjustments to production end when firms in competitive markets experience a price equal to marginal revenue.

Question 28

In a competitive market, the actions of any single buyer or seller will have a negligible impact on the market price.

Question 29

Sunk costs are relevant to decisions about business strategy, as huge amounts of time have been invested in ensuring that the business is set up for success.

Question 30

Regardless of the time horizon considered, firms in a competitive market will never earn positive economic profit.

Question 31

When looking at entering the marketplace, a prospective entrant should not consider fixed costs, as these will become sunk.

Question 32

At the end of the process of entry and exit, it is possible that some firms in a competitive market are making positive economic profit.

Question 33

When a resource used in the production of a good sold in a competitive market is available in only limited quantities, the long-run supply curve is likely to be upward-sloping.

Question 34

If a perfectly competitive firm in equilibrium increases output by 25 per cent marginal revenue will fall and marginal costs will rise.

Question 35

The long-run supply curve in a competitive market must be more inelastic than the short-run supply curve.

Question 36

When a profit-maximising firm in a competitive market experiences rising prices, it will respond with an increase in production.

Question 37

If a firm is making zero economic profit, it can still be making a positive accounting profit.

Question 38

A profit-maximising firm should always increase the level of production if marginal cost exceeds marginal revenue.

Question 39

In the long run, when price is less than average total cost for all possible levels of production, a firm in a competitive market will choose to exit (or not enter) the market.

Question 40

Restaurants often remain open for lunch even if they attract few customers because, the variable costs are small relative to the revenue, even if the fixed costs are large.

Question 41

For a firm in a perfectly competitive market, the price of the good is always equal to:

A)marginal revenue
B)average revenue
C)equilibrium market price.
D)all of the above

Question 42

NARRBEGIN: Table 14-2
Table 14-2
The price of each butterfly that David Butterfly, a butterfly farmer in Greytown, sells is:
Quantity Price ($US)
1 15
2 15
3 15
4 15
5 15
6 15
7 15
8 15
9 15
Refer to Table 14-2.Price equals average revenue over the range of:

A)one to three
B)three to six
C)six to nine
D)over the whole range of output

Question 43

NARRBEGIN: Table 14-2
Table 14-2
The price of each butterfly that David Butterfly, a butterfly farmer in Greytown, sells is:
Quantity Price ($US)
1 15
2 15
3 15
4 15
5 15
6 15
7 15
8 15
9 15
Refer to Table 14-2.If the firm doubles its output from three to six units, total revenue will:

A)increase by less than $45
B)increase by more than $45
C)increase by exactly $45
D)this cannot be determined without data on the farmer's costs

Question 44

Total Revenue for a firm is calculated as:

A)total revenue minus total cost
B)marginal revenue minus average cost
C)market price times quantity sold
D)marginal revenue minus marginal cost

Question 45

NARRBEGIN: Table 14-1
Table 14-1
This table shows the revenue and costs of a parrot farmer.
Refer to Table 14-1.Average revenue will be equal to marginal cost when the harvest is equal to:

A)one parrot
B)three parrots
C)five parrots
D)10 parrots

Question 46

NARRBEGIN: Table 14-2
Table 14-2
The price of each butterfly that David Butterfly, a butterfly farmer in Greytown, sells is:
Quantity Price ($US)
1 15
2 15
3 15
4 15
5 15
6 15
7 15
8 15
9 15
Refer to Table 14-2.Marginal revenue is declining over the range:

A)none; marginal revenue is constant over the whole range of output
B)one to three
C)three to six
D)three to nine

Question 47

Suppose a firm is operating in a competitive market where the price of the good is $12.If, at the current level of output, the firm's average cost is $15, marginal cost is $17, and fixed costs are $10, then the firm will:

A)increase profit by increasing output
B)increase profit by decreasing output
C)maximise profit by keeping output constant
D)we cannot say without more information

Question 48

NARRBEGIN: Table 14-1
Table 14-1
This table shows the revenue and costs of a parrot farmer.
Refer to Table 14-1.If the farmer chooses to maximise profit, the appropriate output level is where marginal cost is equal to:

A)$5
B)$10
C)$11
D)$33

Question 49

NARRBEGIN: Table 14-1
Table 14-1
This table shows the revenue and costs of a parrot farmer.
Refer to Table 14-1.The maximum profit available to this farmer's firm is:

A)$0
B)$17
C)$33
D)$45

Question 50

When a firm has little ability to influence market prices, it is said to be in what kind of a market?

A)a strategic market
B)a competitive market
C)a power market
D)a thin market

Question 51

NARRBEGIN: Table 14-1
Table 14-1
This table shows the revenue and costs of a parrot farmer.
Refer to Table 14-1.If the farmer harvested three parrots then:

A)fixed cost is zero
B)marginal cost is $8
C)marginal revenue is less than average variable cost
D)marginal revenue is less than marginal cost

Question 52

NARRBEGIN: Table 14-1
Table 14-1
This table shows the revenue and costs of a parrot farmer.
Refer to Table 14-1.If the farmer determines that marginal cost is $14, a harvest of parrots should:

A)increase production to maximise profit
B)decrease production to maximise profit
C)maintain its current level of production to maximise profit
D)stop the farm and exit the industry

Question 53

Choose the correct statement.A competitive market is where:
(i) there are many buyers and sellers in a market
(ii) a single firm does not have a significant impact on the market price
(iii) the goods offered for sale are largely the same

A)(i) and (ii) only
B)(ii) and (iii) only
C)(i) and (iii) only
D)(i), (ii) and (iii)

Question 54

NARRBEGIN: Table 14-2
Table 14-2
The price of each butterfly that David Butterfly, a butterfly farmer in Greytown, sells is:
Quantity Price ($US)
1 15
2 15
3 15
4 15
5 15
6 15
7 15
8 15
9 15
Refer to Table 14-2.The price and quantity relationship shows that the market structure most likely facing a butterfly farmer is a:

A)trade market
B)competitive market
C)developing market
D)resource market

Question 55

NARRBEGIN: Table 14-1
Table 14-1
This table shows the revenue and costs of a parrot farmer.
Refer to Table 14-1.If the farmer is harvesting three parrots, the best response would be to:

A)increase production to maximise profit
B)plant more vines for the parrots to feed on
C)maintain its current level of production to maximise profit
D)decrease production to maximise profit

Question 56

Which of the following are true of comparing marginal revenue to marginal cost?
(i) it reveals the contribution of the last unit of production to total profit
(ii) it is helpful in making profit-maximising production decisions
(iii) it always reveals whether a firm is making an economic profit
(iv) it tells a firm whether its fixed costs are too high

A)(i) and (ii) only
B)(iii) only
C)(ii) and (iii) only
D)(i), (ii), (iii) and (iv)

Question 57

When a firm has market power, it can:

A)sell as much as it wants at any market price
B)control the number of firms that will operate in an industry
C)influence the market price of the good it sells
D)choose to disregard government regulation

Question 58

The costs of investigating new factories can be regarded as a sunk cost.

Question 59

In a competitive market, the price line also represents a firm's:

A)marginal revenue curve
B)average revenue curve
C)marginal profit curve
D)both the marginal revenue and average revenue curves

Question 60

If a firm with increasing marginal costs is operating in a competitive market, then average revenue will be:

A)increasing in firm output
B)decreasing in firm output
C)constant regardless of firm output
D)we cannot say without more information

Question 61

NARRBEGIN: 14-1
Graph 14-1
This graph depicts the cost structure for a firm in a competitive market.Use the graph to answer the following question(s).
Refer to Graph 14-1.When marginal revenue is equal to MC3, the profit-maximising firm will produce what level of output?

A)Q₁
B)Q₂
C)Q₃
D)Q₄

Question 62

A rice farmer sells rice to an Australian grain broker.Suppose that the market for rice is competitive.This means that the farmer will maximise profit by choosing:

A)to produce the quantity at which average fixed cost is minimised
B)to sell its wheat at a price where marginal cost is equal to average total cost
C)the quantity at which market price is equal to the farm's marginal cost of production
D)the quantity where average revenue is equal to the farm's average variable cost

Question 63

Of the following characteristics of competitive markets, which are necessary for firms to be price takers?
(i) many sellers
(ii) goods offered for sale are largely the same
(iii) firms can freely enter or exit the market

A)(i) and (ii) only
B)(iii) only
C)(ii) and (iii) only
D)all are necessary

Question 64

Profit-maximising producers in a competitive market in general, produce output at a point where:

A)marginal cost is decreasing
B)total sales are maximised
C)marginal cost is increasing
D)price is less than marginal revenue

Question 65

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)sellers will have little reason to charge less than the going market price
D)buyers will have market power

Question 66

The Wheeler Wheat Farm sells wheat to a grain broker.Since the market for wheat is generally considered to be competitive, the Wheeler Farm:

A)does not choose the quantity of wheat to produce
B)does not have any fixed costs of production
C)is not able to earn an accounting profit
D)does not choose the price at which it sells its wheat

Question 67

Graph 14-1
This graph depicts the cost structure for a firm in a competitive market.Use the graph to answer the following question(s).

-Refer to Graph 14-1.When market price is at MC₂, a firm producing output level Q₁ would experience:

A)profits equal to (MC₂ - MC₁) * Q₁
B)zero profits
C)losses equal to (MC₂ - MC₁) * Q₁
D)losses because P < ATC

Question 68

When firms think at the margin and make incremental adjustments to the level of production, they are naturally led to a level of production where:

A)average variable cost exceeds marginal cost
B)costs are minimised
C)profit is maximised
D)total cost is less than average revenue

Question 69

When a firm in a competitive market produces 10 units of output, it has marginal revenue of $8.What is the firm's total revenue when it produces nine units of output?

A)$18
B)$60
C)$72
D)this cannot be determined from the information given

Question 70

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)producers agree not to change the price
D)government intervention prevents firms from influencing price

Question 71

Which of the following is not a characteristic of a perfectly competitive market?

A)firms are price takers
B)there are many sellers in the market
C)goods offered for sale are largely the same
D)firms have difficulty entering the market

Question 72

Why would a profit-maximising firm in a competitive market set a price higher than the market price?

A)if this would result in higher profits
B)if the firm's costs had increased
C)if this would increase the firm's market share
D)none of the above

Question 73

NARRBEGIN: 14-1
Graph 14-1
This graph depicts the cost structure for a firm in a competitive market.Use the graph to answer the following question(s).
Refer to Graph 14-1.When market price is at MC4, a profit-maximising firm will produce what level of output?

A)Q₁
B)Q₂
C)Q₃
D)Q₄

Question 74

When buyers in a competitive market take the selling price as given, they are said to be:

A)free-riders
B)market entrants
C)price takers
D)monopolists

Question 75

The implication of a firm being a price taker is that, if it increases its price then:

A)buyers will purchase from other sellers instead
B)buyers will pay the higher price in the short run
C)other sellers in the market will increase prices as well
D)the firm will need to advertise to sell its goods

Question 76

When marginal revenue equals marginal cost:

A)the firm must be generating economic profits
B)the profit-maximising firm should always increase its level of production
C)the firm must be generating economic losses
D)losses may be minimised, rather than profits being maximised

Question 77

NARRBEGIN: 14-1
Graph 14-1
This graph depicts the cost structure for a firm in a competitive market.Use the graph to answer the following question(s).
Refer to Graph 14-1.What price level will leave the profit-maximising firm with zero profits?

A)MC1
B)MC2
C)MC3
D)MC4

Question 78

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 no incentive to charge less than the going price
C)the firm can sell as much as it wants at the going price
D)all of the above are true

Question 79

If a firm in a competitive market increases production and its marginal revenue remains greater than its marginal cost, raising production will:

A)be profitable
B)cause the firm to incur losses
C)leave profit unchanged
D)It is impossible to tell from the information provided

Question 80

When you buy a product from a firm in a competitive market, the price you pay for the product is likely to be:

A)equal to the marginal revenue of the firm
B)less than the average revenue of the firm
C)much greater than the cost of producing the product
D)all of the above