Chapter 11: MANAGERIAL DECISIONS IN COMPETITIVE MARKETS
Chapter 11: MANAGERIAL DECISIONS IN COMPETITIVE
MARKETS
Multiple Choice
11-1 Which of the following is NOT a condition of a perfect competition:
a. products produced by rival firms are perfect substitutes
b. a single firm cannot affect market supply
c. unrestricted entry and exit
d. industry sales are small
e. each firm has complete knowledge about production and prices
11-2 In a perfectly competitive market
a. a firm must lower price to attract more customers.
b. the additional revenue from selling one more unit of output is less than price.
c. demand facing the industry is perfectly elastic.
d. all of the above
e. none of the above
11-3 For a price-taking firm, marginal revenue
a. is the addition to total revenue from producing one more unit of output.
b. decreases as the firm produces more output.
c. is equal to price at any level of output.
d. both a and b
e. both a and c
Chapter 11: MANAGERIAL DECISIONS IN COMPETITIVE MARKETS
11-4 Total cost schedule for a competitive firm:
Output
Total Cost
0
$ 10
1
60
2
80
3
110
4
165
5
245
If market price is $60, how many units of output will the firm produce?
a. Zero units of output because the firm shuts down.
b. 1 unit of output.
c. 2 units of output.
d. 3 units of output.
e. none of the above.
11-5 Total cost schedule for a competitive firm:
Output
Total Cost
0
$ 10
1
60
2
80
3
110
4
165
5
245
If market price is $60, what is the maximum profit the firm can earn?
a. −$10
b. Zero profit, the firm shuts down
c. $75
d. $80
e. $85
Chapter 11: MANAGERIAL DECISIONS IN COMPETITIVE MARKETS
11-6 Total cost schedule for a competitive firm:
Output
Total Cost
0
$ 10
1
60
2
80
3
110
4
165
5
245
If market price is $30, how many units of output will the firm produce?
a. 0, the firm shuts down
b. 1
c. 2
d. 3
e. 4
11-7 In a perfectly competitive industry the market price is $25. A firm is currently producing 10,000
units of output; average total cost is $28, marginal cost is $20, and average variable cost is $20.
The firm should
a. raise price because the firm is losing money.
b. keep output the same because the firm is producing at minimum average variable cost.
c. produce more because the next unit of output increases profit by $5.
d. produce less because the next unit of output decreased profit by $3.
e. shut down because the firm is losing money.
Chapter 11: MANAGERIAL DECISIONS IN COMPETITIVE MARKETS
11-8 Below, the graph on the left shows the short-run marginal cost curve for a typical firm selling in a
perfectly competitive industry. The graph on the right shows current industry demand and supply.
If the firm’s demand and marginal revenue curves were drawn in the left-hand graph, what would
be the elasticity of demand?
a. zero
b. −6
c. −0.6
d. infinitely elastic
e. unitary
11-9 Below, The graph on the left shows the short-run marginal cost curve for a typical firm selling in
a perfectly competitive industry. The graph on the right shows current industry demand and
supply.
Chapter 11: MANAGERIAL DECISIONS IN COMPETITIVE MARKETS
What is the marginal revenue for the FIRM from selling the 250th unit of output?
a. $10
b. $8
c. $6
d. $4
e. zero
11-10 The graph below on the left shows the short-run marginal cost curve for a typical firm selling in a
perfectly competitive industry. The graph on the right shows current industry demand and supply.
What output should the firm produce?
a. 200
b. 250
c. 150
d. 300
Chapter 11: MANAGERIAL DECISIONS IN COMPETITIVE MARKETS
11-11 The graph below shows demand and marginal cost for a perfectly competitive firm. If the firm is
producing 100 units of output, increasing output by one unit would ______ the firm’s profit by
$______.
a. increase, $3
b. increase, $2
c. decrease, $1
d. increase, $1
e. decrease, $2
11-12 The graph below shows demand and marginal cost for a perfectly competitive firm. If the firm is
producing 300 units of output, decreasing output by one unit would ______ the firm’s profit by
$______.
Chapter 11: MANAGERIAL DECISIONS IN COMPETITIVE MARKETS
a. decrease, $2
b. increase, $2
c. increase, $3
d. decrease, $5
e. increase, $5
11-13 In order to minimize losses in the short run, a perfectly competitive firm should shut down if
a. total revenue is less than total cost.
b. total revenue is less than total fixed cost.
c. total revenue is less than total variable cost.
d. total revenue is less than the difference between total fixed cost and total variable cost.
11-14 Below, the graph on the left shows the short−run cost curves for a firm in a perfectly competitive
market, and the graph on the right shows the current market conditions in this industry. In order
to maximize profit, how much output should the firm produce?
Chapter 11: MANAGERIAL DECISIONS IN COMPETITIVE MARKETS
a. 20 units
b. 40 units
c. 50 units
d. 60 units
e. 80 units
11-15 Below, the graph on the left shows the short−run cost curves for a firm in a perfectly competitive
market, and the graph on the right shows the current market conditions in this industry. What is
the maximum amount of profit the firm can earn?
a. $ 50
b. $ 40
c. $ 80
d. $150
Chapter 11: MANAGERIAL DECISIONS IN COMPETITIVE MARKETS
11-16 Below, the graph on the left shows the short−run cost curves for a firm in a perfectly competitive
market, and the graph on the right shows the current market conditions in this industry. What do
you expect to happen in the long-run?
a. Market supply will decrease.
b. Market price will decrease.
c. The firm’s profit will decrease.
d. both b and c
e. all of the above
11-17 Which of the following is NOT a characteristic of long-run equilibrium for a perfectly
competitive firm?
a. Price is greater than long-run average cost.
b. Price is equal to long-run marginal cost.
c. Economic profit is zero.
d. The firm produces the output level at which long-run average cost is at its minimum.
11-18 When total fixed costs increase,
a. the profit-maximizing level of output falls.
b. the firm may be forced to shut down if total fixed costs get too high.
c. economic profit decreases.
d. both a and b
e. both b and c
Chapter 11: MANAGERIAL DECISIONS IN COMPETITIVE MARKETS
11-19 A competitive firm will maximize profit by producing the level of output at which
a. the last unit of output produced adds the same amount to total revenue as to total cost.
b. the additional revenue from the last unit of output produced exceeds the additional cost of
the last unit by the largest amount.
c. the firm’s total revenue exceeds total cost by the largest amount.
d. both a and b
e. both a and c
11-20 Firm A and firm B both have total revenues of $200,000 and total costs of $250,000; firm A has
total fixed costs of $40,000, while firm B has total fixed costs of $70,000. Which of the following
statements are true in the short run?
a. Firm A should operate.
b. Firm B should operate.
c. Firm A should shut down.
d. Firm B should shut down.
e. both b and c
11-21 When a perfect competitive industry is in long-run equilibrium,
a firms have no incentive to enter or exit the industry.
b. market price is equal to minimum long−run average cost.
c. each firm earns a normal return.
d. both a and c
e. all of the above
Chapter 11: MANAGERIAL DECISIONS IN COMPETITIVE MARKETS
11-22 Which of the following is NOT a characteristic of an increasing cost competitive industry? As the
industry expands in the long run,
a. the price of product remains constant.
b. the prices of some inputs rise.
c. the cost of production increases.
d. the number of firms increase.
e. none of the above
11-23 Which of the following is NOT a characteristic of a constant cost competitive industry? As the
industry expands in the long run,
a. the price of the product remains constant.
b. input prices remain constant.
c. the cost of production remains constant.
d. the number of firms remain constant.
e. none of the above
11-24 An industry is in long-run competitive equilibrium. The price of a substitute good increases.
a. The product price will rise.
b. New firms will enter the market.
c. Firms will begin earning economic profit.
d. a and b
e. all of the above
11-25 A typical firm in a perfectly competitive market made positive economic profits last period. This
period,
a. market supply will increase.
b. market price will rise.
c. the firm will produce more.
d. the firm’s profits will increase.
Chapter 11: MANAGERIAL DECISIONS IN COMPETITIVE MARKETS
11-26 Suppose that a perfectly competitive industry is in long-run equilibrium. The price of a
complement good decreases. What will happen?
a. Next period a typical firm will increase output.
b. Next period a typical firm will earn positive economic profit.
c. Eventually firms will exit the industry.
d. both a and b
e. all of the above will happen
11-27 The table below shows a competitive firm’s short-run production function. Labor is the firm’s
only variable input, and market price for the firm’s product is $2 per unit.
Units of Output
370
490
570
600
620
How much does the fifth unit of labor add to the firm’s total revenue?
a. $160
b. $80
c. $60
d. $40
e. $10
11-28 The table below shows a competitive firm’s short-run production function. Labor is the firm’s
only variable input, and market price for the firm’s product is $2 per unit.
Units of Output
370
490
570
Chapter 11: MANAGERIAL DECISIONS IN COMPETITIVE MARKETS
600
620
If the wage rate is $200, how many units of labor will the firm employ?
a. 3
b. 4
c. 5
d. 6
e. 0, the firm shuts down
11-29 The table below shows a competitive firm’s short-run production function. Labor is the firm’s
only variable input, and market price for the firm’s product is $2 per unit.
Units of Output
370
490
570
600
620
If the wage rate is $200, the firm should
a. shut down because average revenue product is $200, which is less than marginal revenue
product.
b. shut down because average revenue product is $228, which is greater than the wage rate.
c. produce because average revenue product is $200, which is less than marginal revenue
product.
d. produce because average revenue product is $245, which is greater than the wage rate.
11-30 The table below shows a competitive firm’s short-run production function. Labor is the firm’s
only variable input, and market price for the firm’s product is $2 per unit.
Units of Output
370
490
570
600
620
Chapter 11: MANAGERIAL DECISIONS IN COMPETITIVE MARKETS
If market price for the firm’s product increases to $5, how many units of labor will the firm
employ at a wage rate of $200?
a. 0, the firm shuts down
b. 4
c. 5
d. 6
e. 7
11-31 A competitive firm will maximize profit by hiring the amount of an input at which
a. the last unit of the input hired adds the same amount to total revenue as to total cost.
b. the additional revenue from the last unit of the input hired exceeds the additional cost of
the last unit by the largest amount.
c. the last unit of the input hired adds the same amount to total output as to total cost.
d. the additional output from the last unit of the input hired exceeds the additional cost of
the last unit by the largest amount.
Learning Objective: 11-05
11-32 A firm in a competitive industry faces a market price for output of $25 and a wage rate of $750.
At the current level of employment (50 units of labor), the marginal product of labor is 20. In
order to maximize profit, the firm should
a. hire less labor because the firm is suffering a loss of $12,500.
b. hire less labor because hiring the last unit of labor decreased profit by 250.
c. hire more labor because hiring another unit of labor would increase profit by $500.
d. keep the level of employment the same because the firm is earning a profit of $500.
Chapter 11: MANAGERIAL DECISIONS IN COMPETITIVE MARKETS
11-33
The graph above shows cost curves for a perfectly competitive firm. If market price is $5, how
much output will the firm produce?
a. 0 units
b. 200 units.
c. 500 units.
d. 600 units
Chapter 11: MANAGERIAL DECISIONS IN COMPETITIVE MARKETS
11-34
The graph above shows cost curves for a perfectly competitive firm. If market price is $5, how
much profit will the firm earn?
a $600
b. $900
c. $3,000
d. −$600
Chapter 11: MANAGERIAL DECISIONS IN COMPETITIVE MARKETS
11-35
The graph above shows cost curves for a perfectly competitive firm. If market price is $3, how
much profit will the firm earn?
a. $200
b. −$200
c. $400
d. −$400
11-36
The graph above shows cost curves for a perfectly competitive firm. If market price is $2, how
much profit will the firm earn?
a. $600
b. −$600
Chapter 11: MANAGERIAL DECISIONS IN COMPETITIVE MARKETS
c. zero
d. $400
11-37
The graph above shows cost curves for a perfectly competitive firm. The firm will break even if
price is:
a. $2
b. $3.90
c. $5
d. $6
11-38 Which of the following CANNOT be true at any output along a perfectly competitive firm’s
short-run supply curve?
a. Average total cost is greater than marginal cost.
b. Marginal cost is greater than average total cost.
c. Average variable cost is greater than marginal cost.
d. Marginal cost is greater than average variable cost.
Chapter 11: MANAGERIAL DECISIONS IN COMPETITIVE MARKETS
11-39 In a perfectly competitive market,
a. a firm can attract more customers by lowering its price.
b. a firm can sell as much as it wants at the existing market price.
c. the additional revenue from selling one more unit of output is less than the market price.
d. both a and c
e. both b and c
Chapter 11: MANAGERIAL DECISIONS IN COMPETITIVE MARKETS
11-40 To answer the question, refer to the following figure, showing the marginal revenue product
(MRP) and the average revenue product (ARP) curves of a perfectly competitive firm hiring a
single variable input, labor.
If the wage is $20, how many workers will the firm hire?
a. 225
b. 175
c. 200
d. zero
11-41 To answer the question, refer to the following figure, showing the marginal revenue product
(MRP) and the average revenue product (ARP) curves of a perfectly competitive firm hiring a
single variable input, labor.