Quizz Section 8

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.

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.

Refer to Table 14-5. The maximum profit available to this firm is

• a. $2.

• b. $3.

• c. $4.

• d. $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

Competitive firms that earn a loss in the short run should

• a. shut down if P < AVC.

• b. raise their price.

• c. lower their output.

• d.All of the above are correct.

For a firm operating in a perfectly competitive industry, total revenue, marginal revenue, and average revenue are all equal. 

• TRUE

• FALSE

A firm is currently producing 100 units of output per day.  The manager reports to the owner that producing the 100th unit costs the firm $5.  The firm can sell the 100th unit for $5.  The firm should continue to produce 100 units in order to maximize its profits (or minimize its losses).

• FALSE

• TRUE

Answer explanation

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)

Answer explanation

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 with which to answer the question.

Answer explanation

Consider a firm operating in a competitive market. The firm is producing 40 units of output, has an average total cost of production equal to $5, and is earning $240 economic profit in the short run. What is the current market price?

• a. $9

• b. $10

• d. $11

• d. $12