Microeconomics, 4e – Testbank 2 (Hubbard)
Chapter 12 Firms in Perfectly Competitive Markets
12.1 Perfectly Competitive Markets
1) Which of the following arguments could be made as evidence that the market for produce sold
at a farmers’ market is perfectly competitive?
A) The U.S. Department of Agriculture has established standards for the labeling of organic
produce sold at farmers’ markets.
B) Sales of organically grown food have increased at a rate of 20 percent per year.
C) As more farmers began selling their products at farmers’ markets, the increase in supply has
driven down prices to the point where they just cover the cost of production.
D) The profits earned by farmers who sell their products at farmers’ markets have continued to
grow, despite the increasing number of farmers entering this market.
2) Which of the following characteristics of a farmers’ market make it a good example of a
perfectly competitive market?
A) Selling product at a farmers’ market was very profitable for farmers in the early 2000s. As
result, many farmers sold their farms to larger firms.
B) Farmers who sell product at a farmers’ market are similar to other entrepreneurs who
introduce products that earn short-run profits but invite competition that drives down prices and
profits in the long run.
C) Farmers who sell product at a farmers’ market are similar to other business owners who take
advantage of the willingness of some consumers to pay high prices for new and different
products.
D) Farmers selling product at a farmers’ market provide a product that is a necessity, rather than
a luxury.
3) Firms in perfectly competitive industries are unable to control the prices of the products they
sell and earn a profit in the long run. Which of the following is one reason for this?
A) Owners of perfectly competitive firms realize that their short-run profits are temporary.
Therefore, they either sell their businesses or develop other products that will earn short-run
profits.
B) Firms in perfectly competitive industries can use advertising in the short run to persuade
consumers that their products are better than those of other firms. But eventually consumers
realize that all of the firms sell virtually identical products.
C) Firms from other countries are able to produce similar products at lower costs.
D) Firms in these industries sell identical products.
4) The delivery of first-class mail by the U.S. Postal Service is an example of
A) a monopoly.
B) perfect competition because consumers have access to other methods of written
communication; for example, email and text messaging.
C) monopolistic competition, because mail delivery is a differentiated product provided by many
firms.
D) an oligopoly because a few other firms provide delivery of letters and packages.
5) A perfectly competitive firm faces a demand curve that is
A) horizontal.
B) vertical.
C) perpendicular to the quantity axis.
D) perfectly inelastic.
6) Some markets have many buyers and sellers but fall into the category of monopolistic
competition rather than perfect competition. The most common reason for this is
A) there are high barriers to entering these markets.
B) firms in these markets sell identical products.
C) firms in these markets make high profits.
D) firms in these markets do not sell identical products.
7) Which of the following is a characteristic of a firm in a perfectly competitive market?
A) The firm cannot make a profit in the short run because it is too small a part of the total
market.
B) The firm can make a profit in the long run but not in the short run.
C) The firm can sell as much as it wants without having to lower its price.
D) The firm must lower its price in order to increase quantity demanded.
8) If a perfectly competitive firm raises the price it charges to consumers, which of the following
is the most likely outcome?
A) The firm’s revenue will not change because some consumers will refuse to pay the higher
price.
B) The firm will not sell any output.
C) The firm’s total revenue will increase only if the demand for its product is inelastic.
D) The firm’s total revenue will increase only if the demand for its product is elastic.
9) A perfectly competitive firm has to charge the same price as every other firm in the market.
Therefore, the firm
A) faces a perfectly inelastic demand curve.
B) is not able to make a profit in the short run.
C) is a price taker.
D) faces a perfectly elastic supply curve.
10) Which of the following is not an assumption of perfectly competitive markets?
A) There are many sellers and many buyers, all of which are small relative to the market.
B) Each firm produces a similar but not identical product.
C) There are no barriers to new firms entering the market.
D) The products sold by all firms in the market are identical.
11) In a perfectly competitive market the term “price taker” applies to
A) sellers and buyers.
B) firms but not buyers.
C) buyers but not sellers.
D) only the smallest sellers and buyers.
12) Which of the following describes the difference between the market demand curve for a
perfectly competitive industry and the demand curve for a firm in this industry?
A) The market demand curve is a horizontal line; the firm’s demand curve is downward-sloping.
B) The market demand curve is downward-sloping; the firm’s demand curve is a vertical line.
C) The market demand curve can not have a constant slope; the firm’s demand curve has a slope
equal to zero.
D) The market demand curve is downward-sloping; the firm’s demand curve is a horizontal line.
13) The price a perfectly competitive firm receives for its output
A) is determined by the interaction of the firm and all of the consumers who buy from the firm.
B) is determined by the interaction of all sellers and all buyers in the firm’s market.
C) will not change in response to changes in market demand and supply because the firm is a
price taker.
D) will be lowered by the firm in order to sell more output.
14) Which of the following is the best example of a perfectly competitive firm?
A) a corn farmer in Illinois
B) a Taco Bell restaurant
C) the Ford Motor Company
D) the United Parcel Service (UPS)
15) Suppose the equilibrium price in a perfectly competitive industry is $10 and a firm in the
industry charges $12. Which of the following will happen?
A) The firm will sell more output than its competitors.
B) The firm’s revenue will increase.
C) The firm will not sell any output.
D) The firm’s profits will increase.
16) Firms that are price takers
A) must lower their prices to increase sales.
B) are able to sell a fixed quantity of output at the market price.
C) can raise their prices as a result of a successful advertising campaign.
D) are able to sell all their output at the market price.
17) Firms in perfect competition are price takers because
A) one firm determines the price that all other firms in the industry will charge.
B) consumers have enough market power to set prices.
C) firms accept the price determined by the government.
D) each firm is too small relative to the market to be able to influence price.
18) A wheat farmer and a firm in a perfectly competitive market are similar in that
A) both face vertical demand curves.
B) both have to lower their prices if a rival firm lowers its price.
C) both face horizontal demand curves.
D) both will earn an economic profit if their total revenue equals their total cost.
19) Which of the following offers the best reason why restaurants are not considered to be
perfectly competitive firms?
A) Restaurants do not sell identical products.
B) Restaurants compete in small market areas – neighborhoods and cities – rather than in regional
or national markets. Therefore, restaurants are not small relative to their market size.
C) Restaurants usually have entry barriers in the form of zoning restrictions and health
regulations.
D) Restaurants have significant liability costs that perfectly competitive firms do not have; for
example, customers may sue if they suffer from food poisoning.
20) Perfectly competitive industries tend to produce low-priced, low-technology products.
21) The market demand curve in a perfectly competitive market is downward-sloping.
22) What assumptions are necessary for a market to be perfectly competitive? Explain why each
of these assumptions is important.
23) Of the following industries, which are perfectly competitive? For those that are not perfectly
competitive, explain why.
a. Restaurants
b. Corn
c. College education
d. Local radio and television
12.2 How a Firm Maximizes Profit in a Perfectly Competitive Market
1) To maximize profit, a perfectly competitive firm
A) should sell the quantity of output determined by the interaction between industry demand and
supply.
B) should sell the quantity of output that results in a value for total revenue that is equal to total
cost.
C) should produce the quantity of output that results in the greatest difference between total
revenue and total cost.
D) should produce the quantity of output that results in the greatest difference between marginal
revenue and marginal cost.
2) For a perfectly competitive firm, average revenue is equal to
A) marginal cost.
B) the market price.
C) total revenue.
D) average fixed cost.
3) If the market price is $40, the average revenue of selling five units is
A) $8.
B) $20.
C) $40.
D) $200.
4) If the market price is $40 in a perfectly competitive market, the marginal revenue from selling
the fifth unit is
A) $8.
B) $20.
C) $40.
D) $200.
5) For a firm in a perfectly competitive market, price is
A) equal to both average revenue and marginal revenue.
B) equal to average revenue but greater than marginal revenue.
C) greater than marginal revenue but less than average revenue.
D) less than both average revenue and marginal revenue.
6) Marginal revenue is
A) total revenue divided by the total quantity of output.
B) the change in profit divided by the change in the quantity of output.
C) the change in total revenue divided by the change in total cost.
D) the change in total revenue divided by the change in the quantity of output.
7) In a graph that illustrates a perfectly competitive firm, marginal revenue is
A) a diagonal line that lies below the firm’s demand curve.
B) a line that intersects the firm’s demand curve from below at its lowest point.
C) a line that intersects the firm’s average total cost curve from below at its lowest point.
D) the same as the firm’s demand curve.
8) The marginal revenue curve for a perfectly competitive firm
A) is downward-sloping.
B) is the same as its demand curve.
C) is perfectly inelastic.
D) is the same as its marginal cost curve.
9) Mark Frost grows apples in a perfectly competitive market. If we drew a line in a graph that
illustrates Mark’s total revenue from selling apples, it would be
A) a straight, upward-sloping line.
B) a horizontal line.
C) a straight, downward-sloping line.
D) a curve that is negatively sloped at low levels of output and positively sloped at higher levels
of output.
10) Producing where marginal revenue equals marginal cost is equivalent to producing where
A) average total cost equals average revenue.
B) average fixed cost is minimized.
C) total revenue is equal to total cost.
D) total profit is maximized.
11) A perfectly competitive firm’s marginal revenue
A) is greater than price.
B) is less than price because a firm must lower its price to sell more.
C) is equal to price.
D) may be either greater or less than price, depending on the quantity sold.
Table 12-1
Apples
(pounds)
Market Price
per Pound
Total
Revenue
(TR)
Average
Revenue
(AR)
Marginal
Revenue
(MR)
0
$3
$0
—–
—–
100
150
200
250
300
350
400
Table 12-1 lists the various pounds (lbs.) of apples that Margie Stattler can sell. Assume that
Margie operates in a perfectly competitive market.
12) Refer to Table 12-1. What is Margie’s total revenue if she sells 250 pounds of apples?
A) $250
B) $500
C) $750
D) There is not enough information in the table to determine Margie’s total revenue.
13) Refer to Table 12-1. How many pounds of apples should Margie sell to maximize her
profit?
A) 300 pounds
B) 400 pounds
C) This cannot be determined without knowing Margie’s total or marginal production costs.
D) This can be determined only when all of the values for market price, total revenue, average
revenue and marginal revenue are given.
14) What is the relationship among the following variables in for a perfectly competitive firm:
the market price, average revenue and marginal revenue?
A) Average revenue is equal to the market price; average revenue is greater than marginal
revenue.
B) The market price is equal to both average revenue and marginal revenue.
C) Average revenue is equal to marginal revenue; average revenue is greater than the market
price.
D) As a firm lowers the market price to sell more output, marginal revenue and average revenue
will be less than the market price.
15) At the profit-maximizing level of output for a perfectly competitive firm,
A) price equals marginal cost.
B) average revenue equals average variable cost and price equals marginal cost.
C) marginal revenue equals marginal cost and average total cost equals average fixed cost.
D) price equals average revenue and marginal cost equals average variable cost.
16) For a perfectly competitive firm, at profit maximization
A) market price exceeds marginal cost.
B) total revenue is maximized.
C) marginal revenue equals marginal cost.
D) production must occur where average cost is minimized.
17) At the profit-maximizing level of output for a perfectly competitive firm, price equals
marginal cost. Which of the following is also true?
A) The difference between total revenue and total cost is the greatest.
B) Total revenue equals total cost.
C) Average revenue equals average total cost.
D) Marginal profit equals marginal cost.
18) If, for the last bushel of apples produced and sold by an apple farm marginal revenue exceeds
marginal cost, then in producing that bushel the farm
A) added more to total cost than it added to total revenue.
B) added an equal amount to both total revenue and total cost.
C) added more to total revenue than it added to total cost.
D) maximized its profits or minimized its losses.
19) If a perfectly competitive apple farm’s marginal revenue exceeds the marginal cost of the last
bushel of apples sold, what should the farm do to maximize its profit?
A) determine what the total revenue and total cost of production are
B) increase output
C) decrease output
D) lower its price to sell more
20) A perfectly competitive apple farm produces 1,000 bushels of apples at a total cost of
$36,000. The price of each bushel is $50. Calculate the firm’s short-run profit or loss.
A) loss of $14,000
B) profit of $14,000
C) profit of $50,000
D) There is insufficient information to answer the question.
Figure 12-1
21) Refer to Figure 12-1. If the firm is producing 500 units,
A) it is making a profit.
B) it is making a loss.
C) it should maintain its output to maximize profit.
D) it should increase its output to maximize profit.
22) Refer to Figure 12-1. If the firm is producing 500 units, what is the amount of its profit or
loss?
A) profit of $280
B) loss equivalent to the area A
C) profit equivalent to the area A
D) There is insufficient information to answer the question.
23) Refer to Figure 12-1. If the firm is charging a price of $12 per unit
A) it breaks even.
B) it is making a profit.
C) it is selling 700 units.
D) it is not selling any output.
24) Being a price-taker, a perfectly competitive firm cannot receive a producer surplus in the
short run.
25) For a perfectly competitive firm, at the profit-maximizing output average revenue equals
marginal cost.
26) Explain two different ways to determine the profit-maximizing level of output for a firm in a
perfectly competitive market.
27) Fill in the columns in the following table and use the values in the table to determine the
profit-maximizing level of output.
Quantity
Total
Revenue
(TR)
Total
Cost
(TC)
Profit
Marginal
Revenue
(MR)
Marginal
Cost (MC)
0
0
3
1
5
5
2
10
6
3
15
8
4
20
11
5
25
15
6
30
21
7
35
30
8
40
42
9
45
60
10
50
85
Quantity
Profit
0
0
3
-3
—
—
1
5
5
0
5
2
2
10
6
4
5
1
3
15
8
7
5
2
4
20
11
9
5
3
5
25
15
10
5
4
6
30
21
9
5
6
7
35
30
5
5
9
8
40
42
-2
5
12
9
45
60
-15
5
18
10
50
85
-35
5
25