ECON 2113 Practice Problems Ch 14 14 1 A market is competitive if each buyer is small compared to the market and each seller is small compared to the market True 14 2 When a firm has little ability to influence market prices it is said to be in a competitive market True 14 3 In a competitive market the actions of any single buyer or seller will have a negligible impact on the market price True 14 8 For a firm in a perfectly competitive market the price of the good is always equal to marginal revenue True 14 9 If a firm in a perfectly competitive market triples the number of units of output sold then total revenue will more than triple False 14 11 Firms have difficulty entering the market this is NOT a characteristic of a perfectly competitive market True 14 12 When buyers in a competitive market take the selling price as given they are said to be market entrants False 14 21 Whenever a perfectly competitive firm chooses to change its level of output holding the price of the product constant its marginal revenue increases if MR ATC and decreases if MR ATC False 14 34 For a competitive firm Profit Total revenue Total cost True 14 36 For a competitive firm average revenue equals the price of the good but marginal revenue is different False Use the information for a competitive firm in the table below to answer questions 40 through 45 Quantity Total Revenue Total Cost 0 0 10 1 9 14 2 18 19 3 27 25 4 36 32 5 45 40 6 54 49 7 63 59 8 72 70 9 81 82 40 At a production level of 4 units marginal cost is 6 False 14 41 At 3 quantity of output is marginal revenue equal to marginal cost False 1 Chapter 14 Firms in Competitive Markets 2 14 42 If this firm chooses to maximize profit it will choose a level of output where marginal cost is equal to 6 False The graph below depicts the cost structure for a firm in a competitive market Use the graph to answer questions 52 through 55 14 43 The maximum profit available to this firm is 5 True 14 48 If marginal cost exceeds marginal revenue the firm is most likely to be at a profit maximizing level of output False 14 49 When marginal revenue equals marginal cost the firm should increase the level of production to maximize its profit False Note On the above diagram change the vertical axis labels from MC1 to P1 MC2 to P2 etc 14 52 When price is equal to P3 the profit maximizing firm will produce Q1 level of output False 14 54 When market price is at P4 a profit maximizing firm will produce Q1 level of output False 14 57 The additional revenue a firm in a competitive market receives if it increases its production by one unit equals its marginal revenue True Chapter 14 Firms in Competitive Markets 3 14 64 The short run supply curve for a firm in a perfectly competitive market is likely to be horizontal False 14 65 When a perfectly competitive firm makes a decision to shut down it is most likely that marginal cost is above average variable cost False 14 67 Firms that shut down in the short run still have to pay their variable costs False 14 72 If the firm is in a short run position where P AVC it is most likely to be on the BC segment of its supply curve False The figure below depicts the cost structure of a profit maximizing firm in a competitive market Use the figure to answer questions 73 and 74 14 68 When total revenue is less than variable costs a firm in a competitive market will continue to operate as long as average revenue exceeds marginal cost False The figure below depicts the cost structure of a profit maximizing firm in a competitive market Use the figure to answer questions 71 and 72 14 74 This firm will exit the market for any price on the line segment AB True 14 83 In the long run all of a firm s costs are variable In this case the exit criterion for a profit maximizing firm is price average total cost True 14 71 Line segment BCD best reflects the short run supply curve for this firm False 14 85 Profit maximizing firms enter a competitive market when for existing firms in that market total revenue exceeds fixed costs False Chapter 14 Firms in Competitive Markets 4 14 106 If a competitive firm is currently producing a level of output at which marginal revenue exceeds marginal cost then a one unit increase in output will increase the firm s profit True 14 121 The decision to shut down and the decision to exit are both short run decisions this statement is correct regarding a firm s decisionmaking False 14 127 The complete description of a competitive firm s supply curve is as follows The competitive firm s short run supply curve is that portion of the average variable cost curve that lies above marginal cost False 14 147 If the figure in panel a reflects the long run equilibrium of a profitmaximizing firm in a competitive market the figure in panel b is most likely to reflect long run market strategy False 14 131 A firm will exit a market if for all positive levels of output its total revenue is less than its total cost True 14 149 In a market that allows free entry and exit the process of entry and exit ends when for the typical firm in the market profit is zero True 14 144 When new firms have an incentive to enter a competitive market their entry will increase the price of the product False 14 158 The entry of new firms into a competitive market will increase market supply and increase market prices False 14 146 In a perfectly competitive market the process of entry and exit will end when for firms in the market price is equal to average variable cost False 14 172 When some resources used in production are only available in limited quantities it is likely that the long run supply curve in a competitive market is downward sloping False Chapter 14 Firms in Competitive Markets 5 14 176 A long run supply curve that is flatter than a short run supply curve results from the fact that firms can enter and exit a market more easily in the long run than in the short run True 14 178 A market might have an upwardsloping long run supply curve if firms have different costs True 14 180 The assumption of a fixed number of firms is appropriate for analysis of the short run but not the long run Tru e