Firms in Competitive Markets
Multiple Choice – Section 00: Introduction
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.
A restaurant that has market power can
a.
minimize costs more efficiently than its competitors.
b.
influence the market price for the meals it sells.
c.
reduce its marketing budget more than its competitors.
d.
ignore profit-maximizing strategies when setting the price for its meals.
3.
If your local gasoline station raised its price by 20 percent, its sales of gasoline would decrease
substantially because
your local gas station
a.
has little or no market power.
b.
is small relative to the size of the gasoline market.
c.
is a competitive firm.
d.
All of the above are correct.
4.
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.
5.
For any competitive market, the supply curve is closely related to the
a.
preferences of consumers who purchase products in that market.
b.
income tax rates of consumers in that market.
c.
firms’ costs of production in that market.
d.
interest rates on government bonds.
6.
Suppose a firm in each of the two markets listed below were to increase its price by 15 percent. In
which pair would
the firm in the first market listed experience a dramatic decline in sales, but the
firm in the second market listed would
not?
a.
cotton and soybeans
b.
gasoline and corn
c.
#2 lead pencils and college textbooks
d.
electricity and cable television
7.
Suppose a firm in each of the two markets listed below were to increase its price by 25 percent. In
which pair would
the firm in the first market listed experience a dramatic decline in sales, but the
firm in the second market listed would
not?
a.
restaurants and MP3 players
b.
electricity and natural gas
c.
corn and satellite radio
d.
rice and soybeans
Multiple Choice – Section 01: What Is a Competitive Market?
1.
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.
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.
Entry is limited.
d.
Each firm chooses an output level that maximizes profits.
3.
Which of the following is a characteristic of a competitive market?
a.
There are many buyers but few sellers.
b.
Firms sell differentiated products.
c.
There are many barriers to entry.
d.
Buyers and sellers are price takers.
4.
Which of the following is a characteristic of a competitive market?
a.
There are many buyers but few sellers.
b.
Many firms have market power because they own patents.
c.
Buyers and sellers are price takers..
d.
Firms sell differentiated products.
5.
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.
a.
(i) and (ii) only
b.
(i) and (iii) only
c.
(ii) and (iii) only
d.
(i), (ii), and (iii)
8.
A firm that has little ability to influence market prices operates in a
a.
competitive market.
b.
strategic market.
c.
thin market.
d.
power market.
9.
In a competitive market, the actions of any single buyer or seller will
a.
have a negligible impact on the market price.
b.
have little effect on market equilibrium quantity but will affect market equilibrium price.
c.
affect marginal revenue and average revenue but not price.
d.
adversely affect the profitability of more than one firm in the market.
10.
In a competitive market, the actions of any single buyer or seller will
a.
discourage entry by competitors.
b.
influence the profits of other firms in the market.
c.
have a negligible impact on the market price.
d.
None of the above is correct.
Firms in Competitive Markets 3379
11.
In a competitive market, the actions of any single buyer or seller will
a.
discourage entry by competitors.
b.
influence the profits of other firms in the market.
c.
have a negligible impact on the market price.
d.
Both a and b are correct.
12.
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.
only a few buyers will have market power.
d.
sellers will have little reason to charge less than the going market price.
13.
Which of the following is not a characteristic of a perfectly competitive market?
a.
Firms are price takers.
b.
Firms have difficulty entering the market.
c.
There are many sellers in the market.
d.
Goods offered for sale are largely the same.
14.
Which of the following is not a characteristic of a perfectly competitive market?
a.
There are many buyers and sellers.
b.
Firms can freely enter and exit the market.
c.
Many firms have market power.
d.
Firms sell very similar products.
15.
Free entry means that
a.
the government pays any entry costs for individual firms.
b.
government-funded research lowers the costs of patents and other barriers to entry.
c.
a firm‘s marginal cost is zero.
d.
no legal barriers prevent a firm from entering an industry.
16.
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
17.
Which of the following industries is most likely to exhibit the characteristic of free entry?
a.
electricity
b.
satellite radio
c.
mineral mining
d.
tennis shoes
18.
Which of the following industries is least likely to exhibit the characteristic of free entry?
a.
ethnic restaurants
b.
municipal water and sewer
c.
corn farming
d.
grocery stores
19.
Which of the following industries is least likely to exhibit the characteristic of free entry?
a.
bookstores
b.
hairstyling salons
c.
yoga studios
d.
satellite radio
20.
Which of the following industries is least likely to exhibit the characteristic of free entry?
a.
selling running apparel
b.
satellite radio
c.
yoga studios
d.
wheat farming
21.
When buyers in a competitive market take the selling price as given, they are said to be
a.
market entrants.
b.
monopolists.
c.
free riders.
d.
price takers.
22.
When firms are said to be price takers, it implies that if a firm raises its price,
a.
buyers will go elsewhere.
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.
23.
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 an incentive to charge less than the market price to earn higher revenue.
c.
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.
24.
Which of the following statements best reflects a price-taking firm?
a.
The firm can sell only a limited amount of output at the market price before the market price
will fall.
b.
If the firm were to charge less than the going price, it would maximize its profits and revenues.
c.
If the firm were to charge more than the going price, it would sell none of its goods.
d.
Both b and c are correct.
25.
Why does a firm in a competitive industry charge the market price?
a.
If a firm charges less than the market price, it loses potential revenue.
b.
If a firm charges more than the market price, it loses all its customers to other firms.
c.
The firm can sell as many units of output as it wants to at the market price.
d.
All of the above are correct.
26.
Why does a firm in a competitive industry charge the market price?
a.
If a firm charges less than the market price, it loses potential revenue.
b.
If a firm charges more than the market price, it loses all its market power.
c.
The firm can only sell limited number of units of output, so it wants to sell at the market price in
order to lower
its costs.
d.
All of the above are correct.
27.
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.
government intervention prevents firms from influencing price.
d.
producers agree not to change the price.
28.
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.
29.
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)
30.
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.
increase.
b.
remain unchanged.
c.
decrease by less than 20 percent.
d.
decrease by more than 20 percent.
31.
Land of Many Lakes (LML) sells butter to a broker in Albert Lea, Minnesota. Because the
market for butter is
generally considered to be competitive, LML does not
a.
choose the quantity of butter to produce.
b.
set marginal revenue equal to marginal cost to maximize profit.
c.
have any fixed costs of production.
d.
choose the price at which it sells its butter.
32.
Land of Many Lakes (LML) sells butter to a broker in Albert Lea, Minnesota. Because the
market for butter is
generally considered to be competitive, LML does not choose the
a.
quantity of butter to produce.
b.
price at which it sells its butter.
c.
profits it earns.
d.
All of the above are correct.
33.
34.
Land of Many Lakes (LML) sells butter to a broker in Albert Lea, Minnesota. Because the
market for butter is
generally considered to be competitive, LML
a.
can choose the price at which it sells its butter but not the quantity of butter that it produces.
b.
can choose quantity of butter that it produces but not the price at which it sells its butter.
c.
can choose both the price at which it sells its butter and the quantity of butter that it produces.
d.
cannot choose either the price at which it sells it butter or the quantity of butter that it produces.
35.
In a competitive market,
a.
no single buyer or seller can influence the price of the product.
b.
there are only a small number of sellers.
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.