Exercise 9 Solution

Exercise 9 Solution
Chapter 11 Firms in Perfectly Competitive Markets

11.1 Perfectly Competitive Markets

1) Which of the following is not a characteristic of a perfectly competitive market
structure?
A) There are a very large number of firms that are small compared to the market.
B) All firms sell identical products.
C) There are no restrictions to entry by new firms.
D) There are restrictions on exit of firms.
Answer: D
Comment: Recurring
Diff: 1 Page Ref: 368/368
Topic: Market Structures
Objective: LO1: Explain what a perfectly competitive market is and why a perfect
competitor faces a horizontal demand curve.
AACSB: Reflective Thinking
Special Feature: None

2) Which of the following is a characteristic of an oligopolistic market structure?
A) There are few dominant sellers.
B) Each firm sells a unique product.
C) It is easy for new firms to enter the industry.
D) Each firm need not react to the actions of rivals.
Answer: A
Comment: Recurring

3) Perfect competition is characterized by all of the following except
A) heavy advertising by individual sellers.
B) homogeneous products.
C) sellers are price takers.
D) a horizontal demand curve for individual sellers.
Answer: A
Comment: Recurring
Topic: Characteristics of Perfectly Competitive Firms

4) Which of the following is the best example of a perfectly competitive industry?
A) wheat production
B) steel production
C) electricity production
D) airplane production
Answer: A
Comment: Recurring

5) Both individual buyers and sellers in perfect competition
A) can influence the market price by their own individual actions.
B) can influence the market price by joining with a few of their competitors.
C) have to take the market price as a given.
D) have the market price dictated to them by government.
Answer: C
Comment: Recurring

6) Suppose the equilibrium price in a perfectly competitive industry is $15 and a firm in
the industry charges $21. Which of the following will happen?
A) The firm's profits will increase.
B) The firm's revenue will increase.
C) The firm will not sell any output.
D) The firm will sell more output than its competitors.
Answer: C
Comment: Recurring

7) An individual seller in perfect competition will not sell at a price lower than the
market price because
A) demand for the product will exceed supply.
B) the seller would start a price war.
C) the seller can sell any quantity she wants at the prevailing market price.
D) demand is perfectly inelastic.
Answer: C
Comment: Recurring

11.2 How a Firm Maximizes Profit in a Perfectly Competitive Market

1) If the market price is $25, the average revenue of selling five units is
A) $5.
B) $12.50.
C) $25.
D) $125.
Answer: C
Comment: Recurring
Diff: 2 Page Ref: 371-372/371-372
Topic: Average Revenue and Marginal Revenue
Objective: LO2: Explain how a firm maximizes profits in a perfectly competitive
market.

2) Which of the following is not true for a firm in perfect competition?
A) Profit equals total revenue minus total cost.
B) Price equals average revenue.
C) Average revenue is greater than marginal revenue.
D) Marginal revenue equals the change in total revenue from selling one more unit.
Answer: C
Comment: Recurring
Diff: 2 Page Ref: 371-372/371-372
Topic: Average Revenue and Marginal Revenue
market.

3) A perfectly competitive firm produces 3,000 units of a good at a total cost of
$36,000. The
price of each good is $10. Calculate the firm's short-run profit or loss.
A) loss of $6,000
B) profit of $6,000
C) profit of $30,000
D) There is insufficient information to answer the question.
Answer: A
Comment: Recurring
Diff: 1 Page Ref: 372-374/372-374
Topic: Profit-Maximizing Level of Output
market.

4) If, for a perfectly competitive firm, price exceeds the marginal cost of production, the
firm should
A) increase its output.
B) reduce its output.
C) keep output constant and enjoy the above normal profit.
D) lower the price.
Answer: A
Comment: Recurring
Diff: 1 Page Ref: 372-374/372-374
market.

Figure 11-1

5) Refer to Figure 11-1. What is the amount of profit if the firm produces Q
2
units?
A) It is equal to the vertical distance c to g.
B) It is equal to the vertical distance c to Q
2
.
C) It is equal to the vertical distance g to Q
2
.
D) It is equal to the vertical distance c to g multiplied by Q
2
units.
Answer: A
Comment: Recurring
Diff: 1 Page Ref: 372-374/372-374
Skill: Graphing
market.
AACSB: Analytic Skills

6) Refer to Figure 11-1. Suppose the firm is currently producing Q
2
units. What
happens if it expands output to Q
3
units?
A) Its profit increases by the size of the vertical distance df.
B) It makes less profit.
C) It incurs a loss.
D) It will be moving toward its profit maximizing output.
Answer: B
Comment: Recurring
Diff: 1 Page Ref: 372-374/372-374
Skill: Graphing
market.
7) Refer to Figure 11-1. The firm breaks even at an output level of
A) Q
1
units.
B) Q
2
units.
C) Q
3
units.
D) Q
4
units.
Answer: D
Comment: Recurring
Diff: 1 Page Ref: 372-374/372-374
Skill: Graphing
market.

8) Refer to Figure 11-1. What happens if the firm produces more than Q
4
units?
A) Its profit increases.
B) It makes a loss.
C) Its total revenue is increasing faster than its total cost.
D) It could make a profit or a loss depending on what happens to demand.
Answer: B
Comment: Recurring
Diff: 1 Page Ref: 372-374/372-374
Skill: Graphing
market.

9) Refer to Figure 11-1. Why is the total revenue curve a ray from the origin?
A) because revenue increases at an increasing rate
B) because revenue increases at a decreasing rate
C) because the firm can sell its product at a constant price
D) because the firm must lower its price to sell more
Answer: C
Comment: Recurring
Topic: Total Revenue
Skill: Graphing
market.

10) In a graph with output on the horizontal axis and total revenue on the vertical axis,
what is the shape of the total revenue curve for a perfectly competitive seller?
A) U-shaped
B) inverted U-shaped
C) a horizontal line
D) a ray from the origin
Answer: D
Comment: Recurring
Topic: Total Revenue
market.

11) Assume that price is greater than average variable cost. If a perfectly competitive
seller is producing at an output where price is $11 and the marginal cost is $14.54, then
to maximize profits the firm should
A) continue producing at the current output.
B) produce a larger level of output.
C) produce a smaller level of output.
D) There is not enough information given to answer the question.
Answer: C
Comment: Recurring
Diff: 2 Page Ref: 372-374/372-374
market.

11.3 Illustrating Profit or Loss on the Cost Curve Graph

1) A firm's total profit can be calculated as all of the following except
A) total revenue minus total cost.
B) average profit per unit times quantity sold.
C) (price minus average total cost) times quantity sold.
D) marginal profit times quantity sold.
Answer: D
Comment: Recurring
Diff: 2 Page Ref: 374-375/374-375
Topic: Profit
Objective: LO3: Use graphs to show a firm's profit or loss.

Figure 11-2

2) Refer to Figure 11-2. Suppose the prevailing price is P
1
and the firm is currently
producing its loss-minimizing quantity. Identify the area that represents the loss.
A) P
2
deP
1
B) P
3
cbP
1
C) P
3
caP
0
D) 0P
1
bQ
1
Answer: B
Comment: Recurring
Diff: 2 Page Ref: 374-375/374-375
Topic: Profit and Loss
Skill: Graphing

3) All of the following can be used to compute average profit except
A) marginal profit minus marginal cost.
B) total profit divided by quantity.
C) average revenue minus average total cost
D) price minus average total cost.
Answer: A
Topic: Profit
Special Feature: Don't Let This Happen to YOU!: Remember That Firms Maximize
Their Total Profits, Not Their Profits per Unit

11.4 Deciding Whether to Produce or to Shut Down in the Short Run

1) If, for a given output level, a perfectly competitive firm's price is less than its average
variable cost, the firm
A) is earning a profit.
B) should shut down.
C) should increase output.
D) should increase price.
Answer: B
Comment: Recurring
Diff: 2 Page Ref: 379-380/379-380
Topic: Shutting Down in the Short Run
Objective: LO4: Explain why firms may shut down temporarily.

2) When a perfectly competitive firm finds that its market price is below its minimum
average variable cost, it will sell
A) the output where marginal revenue equals marginal cost.
B) any positive output the entrepreneur decides upon because all of it can be sold.
C) nothing at all; the firm shuts down.
D) the output where average total cost equals price.
Answer: C
Comment: Recurring
Diff: 2 Page Ref: 379-380/379-380

3) Val Alvarado, an accountant, quit his $80,000-a-year job and bought an existing
laundry from its previous owner, Ricky White. The lease has five years remaining and
requires a monthly payment of $4,000. Val's explicit cost amounts to $3,000 per month
more than his revenue. Should Val continue operating his business?
A) Val's explicit cost exceeds his total revenue. He should shut down his laundry.
B) Val should continue to run the laundry until his lease runs out.
C) If Val's marginal revenue is greater than or equal to his marginal cost, then he should
stay in business.
D) This cannot be determined without information on his revenue.
Answer: B
Special Feature: Making the Connection: When to Close a Laundry

4) If total variable cost exceeds total revenue at all output levels, a perfectly competitive
firm
A) should produce in the short run.
B) is making short-run profits.
C) should shut down in the short run.
D) has covered its fixed cost.
Answer: C
Comment: Recurring
Diff: 2 Page Ref: 379-380/379-380

5) If a firm shuts down in the short run,
A) its loss equals zero.
B) its loss equals its fixed cost.
C) is makes zero economic profit.
D) its total revenue is not large enough to cover its fixed cost.
Answer: B
Comment: Recurring
Diff: 2 Page Ref: 379-380/379-380

11.5 "If Everyone Can Do It, You Can't Make Money at It" The Entry and
Exit of Firms in the Long Run

1) Which of the following statements is correct?
A) Economic profit takes into account all costs involved in producing a product.
B) Accounting profit is not relevant in preparing the firm's financial statement.
C) Economic profit always exceeds accounting profit.
D) Accounting profit is the same as economic profit.
Answer: A
Comment: Recurring
Diff: 1 Page Ref: 382-383/382-383
Topic: Profit
Objective: LO5: Explain how entry and exit ensure that perfectly competitive firms
earn zero economic profit in the long run.

2) If a typical firm in a perfectly competitive industry is earning profits, then
A) all firms will continue to earn profits.
B) new firms will enter in the long run causing market supply to decrease, market price
to rise and profits to increase.
C) new firms will enter in the long run causing market supply to increase, market price
to fall and profits to decrease.
D) the number of firms in the industry will remain constant in the long run.
Answer: C
Comment: Recurring
Diff: 1 Page Ref: 383-384/383-384
Topic: Long-Run Equilibrium

3) If, in a perfectly competitive industry, the market price facing a firm is above its
average total cost at the output where marginal revenue equals marginal cost, then
A) firms are breaking even.
B) new firms are attracted to the industry.
C) existing firms will exit the industry.
D) market supply will remain constant.
Answer: B
Comment: Recurring
Diff: 2 Page Ref: 383-384/383-384
Topic: Long-Run Equilibrium

11.6 Perfect Competition and Efficiency

1) Which of the following describes a situation in which a good or service is produced
at the lowest possible cost?
A) productive efficiency
B) allocative efficiency
C) marginal efficiency
D) profit maximization
Answer: A
Comment: Recurring
Topic: Productive Efficiency
Objective: LO6: Explain how perfect competition leads to economic efficiency.

2) The perfectly competitive market structure benefits consumers because
A) firms do not produce goods at the lowest possible price in the long run.
B) firms are forced by competitive pressure to be as efficient as possible.
C) firms add a much smaller markup over average cost than firms in any other type of
market structure.
D) firms produce high quality goods at low prices.
Answer: B
Comment: Recurring
Topic: Efficiency

3) Which of the following describes a situation in which every good or service is
produced up to the point where the last unit provides a marginal benefit to consumers
equal to the marginal cost of producing it?
A) productive efficiency
B) allocative efficiency
C) marginal efficiency
D) profit maximization
Answer: B
Comment: Recurring
Topic: Allocative Efficiency

4) A perfectly competitive industry achieves allocative efficiency because
A) goods and services are produced at the lowest possible cost.
B) goods and services are produced up to the point where the last unit provides a
marginal benefit to consumers equal to the marginal cost of producing it.
C) it produces where market price equals marginal production cost.
D) firms carry production surpluses.
Answer: B
Comment: Recurring
Topic: Allocative Efficiency

5) An increase in demand for "green-certified" products will ________ a firm's
economic profit, and the increase in costs to have a product certified as "green" will
________ a firm's economic profit.
A) increase; increase
B) increase; decrease
C) decrease; increase
D) decrease; decrease
Answer: B
Topic: Profit
Special Feature: An Inside LOOK at Policy: It Isn't Easy-or Cheap-to Be Green

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Chapter 11 Firms in Perfectly Competitive Markets

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