Chapter 14 Practice Questions
Multiple Choice
1. A seller in a competitive market
a. can sell all he wants at the going price, so he has little reason to charge less.
b. will lose all his customers to other sellers if he raises his price.
c. considers the market price to be a “take it or leave it” price.
d. All of the above are correct.
ANS: D
2. Which of the following statements regarding a competitive firm is correct?
a. Because demand is downward sloping, if a firm increases its level of output, the firm will
have to charge a lower price to sell the additional output.
b. If a firm raises its price, the firm may be able to increase its total revenue even though it will
sell fewer units.
c. By lowering its price below the market price, the firm will benefit from selling more units at
the lower price than it could have sold by charging the market price.
d. For all firms, average revenue equals the price of the good.
ANS: D
3. 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. ANS: D
4. 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.
, ANS: C
5. Max sells maps. The map industry is competitive. Max hires a business consultant to analyze his
company’s financial records. The consultant recommends that Max increase his production. The
consultant must have concluded that Max’s
a. total revenues exceed his total accounting costs.
b. marginal revenue exceeds his total cost.
c. marginal revenue exceeds his marginal cost.
d. marginal cost exceeds his marginal revenue.
ANS: C
6. Profit-maximizing firms in a competitive market produce an output level where
a. marginal cost equals marginal revenue.
b. marginal cost equals average total cost.
c. marginal revenue is increasing.
d. price is less than marginal revenue.
ANS: A
7. Mrs. Smith operates a business in a competitive market. The current market price is $8.50. At her
profitmaximizing level of production, the average variable cost is $8.00, and the average total cost is
$8.25. Mrs.
Smith should
a. shut down her business in the short run but continue to operate in the long run.
b. continue to operate in the short run but shut down in the long run.
c. continue to operate in both the short run and long run.
d. shut down in both the short run and long run.
ANS: C
8. Winona's Fudge Shoppe is maximizing profits by producing 1,000 pounds of fudge per day. If Winona's
fixed costs unexpectedly increase and the market price remains constant, then the short run profit-
maximizing level of output
a. is less than 1,000 pounds.
b. is still 1,000 pounds.
c. is more than 1,000 pounds.
d. becomes zero.
Multiple Choice
1. A seller in a competitive market
a. can sell all he wants at the going price, so he has little reason to charge less.
b. will lose all his customers to other sellers if he raises his price.
c. considers the market price to be a “take it or leave it” price.
d. All of the above are correct.
ANS: D
2. Which of the following statements regarding a competitive firm is correct?
a. Because demand is downward sloping, if a firm increases its level of output, the firm will
have to charge a lower price to sell the additional output.
b. If a firm raises its price, the firm may be able to increase its total revenue even though it will
sell fewer units.
c. By lowering its price below the market price, the firm will benefit from selling more units at
the lower price than it could have sold by charging the market price.
d. For all firms, average revenue equals the price of the good.
ANS: D
3. 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. ANS: D
4. 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.
, ANS: C
5. Max sells maps. The map industry is competitive. Max hires a business consultant to analyze his
company’s financial records. The consultant recommends that Max increase his production. The
consultant must have concluded that Max’s
a. total revenues exceed his total accounting costs.
b. marginal revenue exceeds his total cost.
c. marginal revenue exceeds his marginal cost.
d. marginal cost exceeds his marginal revenue.
ANS: C
6. Profit-maximizing firms in a competitive market produce an output level where
a. marginal cost equals marginal revenue.
b. marginal cost equals average total cost.
c. marginal revenue is increasing.
d. price is less than marginal revenue.
ANS: A
7. Mrs. Smith operates a business in a competitive market. The current market price is $8.50. At her
profitmaximizing level of production, the average variable cost is $8.00, and the average total cost is
$8.25. Mrs.
Smith should
a. shut down her business in the short run but continue to operate in the long run.
b. continue to operate in the short run but shut down in the long run.
c. continue to operate in both the short run and long run.
d. shut down in both the short run and long run.
ANS: C
8. Winona's Fudge Shoppe is maximizing profits by producing 1,000 pounds of fudge per day. If Winona's
fixed costs unexpectedly increase and the market price remains constant, then the short run profit-
maximizing level of output
a. is less than 1,000 pounds.
b. is still 1,000 pounds.
c. is more than 1,000 pounds.
d. becomes zero.
