Firms in Competitive Markets 3411
77. Firms operating in competitive markets produce output levels where marginal revenue equals
a. price.
b. average revenue.
c. total revenue divided by output.
d. All of the above are correct.
78. For a competitive firm,
a. total revenue equals average revenue.
b. total revenue equals marginal revenue.
c. total cost equals marginal revenue.
d. average revenue equals marginal revenue.
3412 Firms in Competitive Markets
79. 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)
80. Suppose that a firm operating in perfectly competitive market sells 50 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 $10.
(iii) Price equals $15.
a. (i) only
b. (ii) only
c. (i) and (ii) only
d. (i), (ii), and (iii)
Firms in Competitive Markets 3413
81. 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)
82. 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)
3414 Firms in Competitive Markets
83. 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 $3.
(iii) Total revenue equals $900.
a. (i) only
b. (iii) only
c. (i) and (ii) only
d. (i), (ii), and (iii)
84. 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)
Firms in Competitive Markets 3415
85. For a firm operating in a competitive industry, which of the following statements is not correct?
a. Price equals average revenue.
b. Price equals marginal revenue.
c. Total revenue is constant.
d. Marginal revenue is constant.
86. For a firm in a perfectly competitive market, the price of the good is always
a. equal to marginal revenue.
b. equal to total revenue.
c. greater than average revenue.
d. equal to the firm’s efficient scale of output.
3416 Firms in Competitive Markets
87. Suppose a firm in a competitive market produces and sells 8 units of output and has a marginal
revenue of $8. What would be the firm’s total revenue if it instead produced and sold 4 units of
output?
a. $4
b. $8
c. $32
d. $64
88. Suppose a firm in a competitive market produces and sells 8 units of output and has a marginal
revenue of $8. What would be the firm’s marginal revenue if it instead produced and sold 4 units of
output?
a. $2
b. $8
c. $32
d. $64
Firms in Competitive Markets 3417
89. Whenever a perfectly competitive firm chooses to change its level of output, its marginal revenue
a. increases if MR < ATC and decreases if MR > ATC.
b. does not change.
c. increases.
d. decreases.
90. 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. less than $2.50
b. more than $2.50
c. exactly $2.50
d. The marginal revenue cannot be determined without knowing the actual quantity sold by the
typical firm.
3418 Firms in Competitive Markets
91. For an individual firm operating in a competitive market, marginal revenue equals
a. average revenue and the price for all levels of output.
b. average revenue, which is greater than the price for all levels of output.
c. average revenue, the price, and marginal cost for all levels of output.
d. marginal cost, which is greater than average revenue for all levels of output.
92. 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. will also be –0.3.
b. depends on how large a crop the farmer produces.
c. will range between –0.3 and –1.0.
d. will be infinite.
Firms in Competitive Markets 3419
Multiple Choice – Section 02: Profit Maximization and the Competitive Firm’s Supply Curve
1. If a competitive firm is currently producing a level of output at which marginal revenue exceeds
marginal cost, then
a. a one-unit increase in output will increase the firm‘s profit.
b. a one-unit decrease in output will increase the firm’s profit.
c. total revenue exceeds total cost.
d. total cost exceeds total revenue.
2. If a competitive firm is currently producing a level of output at which marginal cost exceeds
marginal revenue, then
a. a one-unit increase in output will increase the firm‘s profit.
b. a one-unit decrease in output will increase the firm’s profit.
c. total revenue exceeds total cost.
d. total cost exceeds total revenue.
3420 Firms in Competitive Markets
3. If a competitive firm is currently producing a level of output at which marginal cost exceeds
marginal revenue, then
a. average revenue exceeds marginal cost.
b. the firm is earning a positive profit.
c. decreasing output would increase the firm’s profit.
d. All of the above are correct.
4. Comparing marginal revenue to marginal cost
(i) reveals the contribution of the last unit of production to total profit.
(ii) is helpful in making profit-maximizing production decisions.
(iii) tells a firm whether its fixed costs are too high.
a. (i) only
b. (i) and (ii) only
c. (ii) and (iii) only
d. (i) and (iii) only
Firms in Competitive Markets 3421
5. 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.
6. The intersection of a firm’s marginal revenue and marginal cost curves determines the level of
output at which
a. total revenue is equal to variable cost.
b. total revenue is equal to fixed cost.
c. total revenue is equal to total cost.
d. profit is maximized.
3422 Firms in Competitive Markets
7. For a certain firm, the 100th unit of output that the firm produces has a marginal revenue of $7 and
a marginal cost of $10. It follows that the
a. production of the 100th unit of output increases the firm‘s profit by $3.
b. production of the 100th unit of output increases the firm’s average total cost by $7.
c. firm‘s profit-maximizing level of output is less than 100 units.
d. production of the101st unit of output must increase the firm’s profit by more than $3.
8. For a certain firm, the 100th unit of output that the firm produces has a marginal revenue of $11
and a marginal cost of $10. It follows that the
a. production of the 100th unit of output increases the firm‘s profit by $1.
b. production of the 100th unit of output increases the firm’s average total cost by $1.
c. firm‘s profit-maximizing level of output is less than 100 units.
d. production of the 101st unit of output must increase the firm’s profit by more than $1.
Firms in Competitive Markets 3423
9. A certain competitive firm sells its output for $20 per unit. The 50th unit of output that the firm
produces has a marginal cost of $22. Production of the 50th unit of output does not necessarily
a. increase the firm’s total revenue by $20.
b. increase the firm’s total cost by $22.
c. decrease the firm’s profit by $2.
d. increase the firm’s average variable cost by $0.44.
10. If a competitive firm is selling 900 units of its product at a price of $10 per unit and earning a
positive profit, then
a. its total cost is more than $9,000.
b. its marginal revenue is less than $10.
c. its average total cost is less than $10.
d. the firm cannot be a competitive firm because competitive firms cannot earn positive profits.
3424 Firms in Competitive Markets
11. If a competitive firm is selling 500 units of its product at a price of $8 per unit and earning a
positive profit, then
a. its average revenue is greater than $8.
b. its marginal revenue is less than $8.
c. its total cost is less than $4,000.
d. All of the above are correct.
12. Farmer McDonald sells wheat to a broker in Kansas City, Missouri. Because the market for
wheat is generally considered to be competitive, Mr. McDonald maximizes his profit by choosing
a. to produce the quantity at which average variable cost is minimized.
b. to produce the quantity at which average fixed cost is minimized.
c. the quantity at which market price is equal to Mr. McDonald’s marginal cost of production.
d. the quantity at which market price exceeds Mr. McDonald‘s marginal cost of production by
the greatest amount.
Firms in Competitive Markets 3425
13. Mr. Rogers sells colored pencils. The colored-pencil industry is competitive. Mr. Rogers hires a
business consultant to analyze his company’s financial records. The consultant recommends that
Mr. Rogers increase his production.
The consultant must have concluded that Mr. Roger’s
a. total revenues equal his total economic costs.
b. marginal revenue exceeds his total cost.
c. marginal revenue exceeds his marginal cost.
d. marginal cost exceeds his marginal revenue.
14. Kate is a professional opera singer who gives voice lessons. The vocal-music industry is
competitive. Kate hires a business consultant to analyze her financial records. The consultant
recommends that Kate give fewer voice lessons. The consultant must have concluded that Kate’s
a. total revenues exceed her total accounting costs.
b. marginal revenue exceeds her total cost.
c. marginal revenue exceeds her marginal cost.
d. marginal cost exceeds her marginal revenue.
3426 Firms in Competitive Markets
15. Laura is a gourmet chef who runs a small catering business in a competitive industry. Laura
specializes in making wedding cakes. Laura sells 20 wedding cakes per month. Her monthly total
revenue is $5,000. The marginal cost of making a wedding cake is $300. In order to maximize
profits, Laura should
a. make more than 20 wedding cakes per month.
b. make fewer than 20 wedding cakes per month.
c. continue to make 20 wedding cakes per month.
d. We do not have enough information to answer the question.
16. Laura is a gourmet chef who runs a small catering business in a competitive industry. Laura
specializes in making wedding cakes. Laura sells 20 wedding cakes per month. Her monthly total
revenue is $5,000. The marginal cost of making a wedding cake is $200. In order to maximize
profits, Laura should
a. make more than 20 wedding cakes per month.
b. make fewer than 20 wedding cakes per month.
c. continue to make 20 wedding cakes per month.
d. We do not have enough information to answer the question.
Firms in Competitive Markets 3427
17. Robin owns a horse stables and riding academy and gives riding lessons for children at “pony
camp.” Her business operates in a competitive industry. Robin gives riding lessons to 20 children
per month. Her monthly total revenue is $4,000. The marginal cost of pony camp is $100 per child.
In order to maximize profits, Robin should
a. give riding lessons to more than 20 children per month.
b. give riding lessons to fewer than 20 children per month.
c. continue to give riding lessons to 20 children per month.
d. We do not have enough information to answer the question.
18. Robin owns a horse stables and riding academy and gives riding lessons for children at “pony
camp.” Her business operates in a competitive industry. Robin gives riding lessons to 20 children
per month. Her monthly total revenue is $4,000. The marginal cost of pony camp is $200 per child.
In order to maximize profits, Robin should
a. give riding lessons to more than 20 children per month.
b. give riding lessons to fewer than 20 children per month.
c. continue to give riding lessons to 20 children per month.
d. We do not have enough information to answer the question.
3428 Firms in Competitive Markets
19. Robin owns a horse stables and riding academy and gives riding lessons for children at “pony
camp.” Her business operates in a competitive industry. Robin gives riding lessons to 20 children
per month. Her monthly total revenue is $4,000. The marginal cost of pony camp is $250 per child.
In order to maximize profits, Robin should
a. give riding lessons to more than 20 children per month.
b. give riding lessons to fewer than 20 children per month.
c. continue to give riding lessons to 20 children per month.
d. We do not have enough information to answer the question.
20. A competitive firm has been selling its output for $20 per unit and has been maximizing its profit,
which is positive. Then, the price rises to $25, and the firm makes whatever adjustments are
necessary to maximize its profit at the now-higher price. Once the firm has adjusted, its
a. quantity of output is higher than it was previously.
b. average total cost is higher than it was previously.
c. marginal revenue is higher than it was previously.
d. All of the above are correct.
Firms in Competitive Markets 3429
21. A competitive firm has been selling its output for $20 per unit and has been maximizing its profit,
which is positive. Then, the price falls to $18, and the firm makes whatever adjustments are
necessary to maximize its profit at the now-lower price. Once the firm has adjusted, its
a. quantity of output is lower than it was previously.
b. average total cost is lower than it was previously.
c. marginal cost is higher than it was previously.
d. All of the above are correct.
22. A competitive firm has been selling its output for $10 per unit and has been maximizing its profit.
Then, the price rises to $14, and the firm makes whatever adjustments are necessary to maximize
its profit at the now-higher price.Once the firm has adjusted, its
a. marginal revenue is lower than it was previously.
b. marginal cost is lower than it was previously.
c. quantity of output is higher than it was previously.
d. All of the above are correct.
3430 Firms in Competitive Markets
23. When profit-maximizing firms in competitive markets are earning profits,
a. market demand must exceed market supply at the market equilibrium price.
b. market supply must exceed market demand at the market equilibrium price.
c. new firms will enter the market.
d. the most inefficient firms will be encouraged to leave the market.
Table 14-7
Suppose that a firm in a competitive market faces the following revenues and costs:
Quantity
Marginal Cost
Marginal Revenue
12
$5
$7.50
13
$6
$7.50
14
$7
$7.50
15
$8
$7.50
16
$9
$7.50
17
$10
$7.50
24. 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 15 units
c. continue to operate at 14 units
d. increase quantity to 16 units