EXERCISE 7: Chapter 23: Exhibit 7-1 (1) (2) (3) Price Quantity Sold Marginal Revenue

EXERCISE 7: Chapter 23
1. Which of the following is not an assumption of the theory of perfect competition?

a. There are many sellers and many buyers, none of which is large in relation to total sales or
purchases.
b. Each firm produces and sells a differentiated product.
c. Buyers and sellers have all relevant information with respect to prices, product quality,
and sources of supply.
d. There is easy entry and exit.
2. Does a real-world market have to meet all the assumptions of the theory of perfect competition before
it is considered a perfectly competitive market?
a. No, probably no real-world market meets all the assumptions of the theory of perfect
competition. All that is necessary is that a real-world market behave as if it satisfies all the
assumptions.
b. Yes, if a real-world market does not meet the assumptions, then it cannot be considered a
perfectly competitive market.
c. Yes, unless it is a new market such as the computer market. New markets are not held to
the same assumptions as old, more established markets.
d. No, but it does have to meet the assumption of producing and selling a homogeneous
product. It does not have to fully meet the other assumptions.
3. A "price taker" is a firm that
a. does not have the ability to control the price of the product it sells.
b. does have the ability, although limited, to control the price of the product it sells.
c. can raise the price of the product (above the market price) and still sell some units of its
product.
d. sells a differentiated product.
4. Perfectly competitive firms are price takers for all of the following reasons except that
a. each firm is quite small relative to the total market supply.
b. buyers and sellers have all the necessary information about prices, etc.
c. the product is homogeneous.
d. barriers to exit force firms to sell at the market price.
5. The perfectly competitive firm will seek to produce the output level for which
a. average variable cost is at a minimum.
b. average total cost is at a minimum.
c. average fixed cost is at a minimum.
d. marginal cost equals marginal revenue.
Exhibit 7-1
(1) (2) (3)

Quantity Marginal
Price Sold Revenue
$12 100
$12 101 (A)
$12 102 (B)
$12 103 (C)
$12 104 (D)
1
6. Refer to Exhibit 7-1. The data in this table are relevant to a perfectly competitive firm because
a. its total revenue is different at different levels of quantities sold.
b. its total revenue is the same at all levels of quantities sold.
c. it doesn't have to lower price to sell additional units of the product.
d. marginal revenue is greater than price.
7. Refer to Exhibit 7-1. The firm’s demand curve represented by the information in this table is
a. downward-sloping.
b. upward-sloping.
c. horizontal.
d. vertical.
8. If MR > MC, then
a. profits will be at their maximum.
b. the firm is producing too much of the good to be maximizing profits.
c. the firm can increase its profits or minimize its losses by increasing output.
d. the firm is necessarily incurring losses.
9. If, for the last unit of a good produced by a perfectly competitive firm, MR > MC, then in producing
that unit the firm
a. added more to total costs than it added to total revenue.
b. added more to total revenue than it added to total costs.
c. added an equal amount to both total revenue and total costs.
d. maximized profits or minimized losses.
Exhibit 7-2
10. Refer to Exhibit 7-2. What quantity does the profit-maximizing or loss-minimizing firm produce?
a. Q1, where "what is coming in" on the last unit is greater than "what is going out."
b. Q2, where the difference between "what is coming in" on the last unit and "what is going
out" is zero.
c. Q3, where marginal cost is greater than marginal revenue.
d. Q4, which maximizes the excess of marginal cost over marginal revenue.
2
11. Refer to Exhibit 7-2. If the firm produces the quantity of output at which marginal revenue (MR)
equals marginal cost (MC), is it guaranteed maximum profit or minimized loss?
a. Yes, when MR = MC, it follows that MR - MC = 0, and thus the firm maximizes profit
and minimizes losses.
b. No, at the quantity of output at which MR = MC, it could be the case that average variable
cost is greater than price and the firm would do better to shut down.
c. Yes, when the firm produces the quantity at which MR = MC, it has maximized both
revenue and profit.
d. Yes, because if the MC curve is rising, the average total cost curve always lies below it
and thus profit is earned.
Exhibit 7-3
(1) (2) (3)

Price Quantity Sold Total Cost
$8 40 $274
$8 41 $276
$8 42 $280
$8 43 $285
$8 44 $293
$8 45 $302
$8 46 $312
$8 47 $325
12. Refer to Exhibit 7-3. What quantity of output should the profit-maximizing firm produce?
a. 41 units
b. 42 units
c. 44 units
d. 45 units
13. Refer to Exhibit 7-3. What is the increase in profit that would result from producing 43 units of the
product rather than producing 40 units?
a. $59
b. $46
c. $16
d. $13
14. Refer to Exhibit 7-3. Is it possible for this firm to produce "too much" in the short-run?
a. Any quantity above 42 units is too much.
b. Any quantity above 44 units is too much.
c. Any quantity above 40 units is too much.
d. none of the above
15. Consider the following data: equilibrium price = $9, quantity of output produced = 1,000 units,
average total cost = $7, and average variable cost $5. Given this, total revenue is __________, total
cost is __________, and total fixed cost is __________.
a. $6,000; $8,000; $1,000
b. $9,000; $7,000; $5,000
c. $10,000; $8,000; $3,000
d. $9,000; $7,000; $2,000
3
16. In the short-run, if P < ATC, a perfectly competitive firm should
a. continue producing at a loss.
b. shut down.
c. continue producing at a profit.
d. There is not enough information to answer the question.
17. Consider the following data: equilibrium price = $10, quantity of output produced = 100 units, average
total cost = $13, and average variable cost = $7. What will the firm do and why?
a. Shut down in the short run, because it is taking a loss of $200.
b. Continue to produce in the short run, because price is greater than average variable cost.
c. Shut down in the short run, because average variable cost is less than average total cost.
d. Continue to produce in the short run, because firms are always stuck with having to
produce in the short run.
18. In order for a firm to continue producing, price must exceed __________ and total revenue must
exceed __________.
a. marginal cost, total cost
b. ATC; total cost
c. AFC; total fixed cost
d. AVC; total variable costs
19. The perfectly competitive firm's short-run supply curve is the
a. upward-sloping portion of its average total cost curve.
b. portion of its average variable cost curve that lies above the average fixed cost curve.
c. upward-sloping portion of its marginal cost curve.
d. portion of its marginal cost curve that lies above its average variable cost curve.
20. Firm X is producing the quantity of output at which marginal revenue equals marginal cost. It is
a. receiving a positive economic profit.
b. taking a loss.
c. earning a normal profit.
d. There is not enough information to answer the question.
21.The short-run industry supply curve is the

a. horizontal summation of the short-run supply curves for all firms in the industry.
b. vertical summation of the short-run supply curves for all firms in the industry.
c. average of the short-run supply curves for all firms in the industry.
d. same as that of the typical firm in the industry.
22. Which of the following conditions does not characterize long-run competitive equilibrium?
a. Economic profit is zero.
b. Price is greater than marginal cost.
c. No firm has an incentive to change its plant size.
d. No firm has an incentive to produce more or less output.
23. If firms are earning zero economic profits, they must be producing at an output level at which
a. price equals marginal cost.
b. price equals average total cost.
c. price equals average variable cost.
d. marginal revenue equals marginal cost.
4
24. When the perfectly competitive firm produces the quantity of output at which marginal revenue equals
marginal cost, it naturally
a. produces the quantity of output at which marginal cost equals price, since for the perfectly
competitive firm price equals marginal revenue.
b. produces the quantity of output at which short-run average total cost equals price, since for
the perfectly competitive firm short-run average total cost equals marginal revenue.
c. earns a profit, since equating marginal revenue and marginal cost guarantees profit.
d. takes a loss.
25. Why must profits be zero in long-run competitive equilibrium?

a. If profits are not zero, firms will enter or exit the industry.
b. If profits are not zero, firms will produce higher-quality goods.
c. If profits are not zero, marginal revenue will rise.
d. If profits are not zero, marginal cost will rise.
26. If an industry is in long-run competitive equilibrium and experiences a decrease in demand, then as a
result the equilibrium price will __________, which will cause the representative firm's __________
curve to shift downward and some firms will __________ the industry.
a. rise; marginal cost; enter
b. fall; marginal cost; enter
c. rise; marginal revenue; enter
d. fall; demand; exit
27. Resource allocative efficiency occurs when a firm
a. minimizes costs of production yet charges the highest possible price.
b. produces the quantity of output at which price equals marginal cost.
c. produces the quantity of output at which price equals average total cost.
d. produces the quantity of output at which price equals average variable cost.
Exhibit 7-3
28. Refer to Exhibit 7-3. The perfectly competitive, profit-maximizing firm will produce __________
units of output.
a. 30
b. 50
c. 60
d. 70
5
29. Refer to Exhibit 7-3. At the profit-maximizing level of output, marginal cost is
a. $60.00.
b. $4.50.
c. $5.00.
d. $6.00.
30. Refer to Exhibit 7-3. At the profit-maximizing output level, the firm's total revenue is
a. $60.00.
b. $225.00.
c. $300.00.
d. $360.00.

EXERCISE 7: Chapter 23: Exhibit 7-1 (1) (2) (3) Price Quantity Sold Marginal Revenue

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EXERCISE 7: Chapter 23: Exhibit 7-1 (1) (2) (3) Price Quantity Sold Marginal Revenue

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EXERCISE 7: Chapter 23

1. Which of the following is not an assumption of the theory of perfect competition?

(1) (2) (3)

(1) (2) (3)

21.The short-run industry supply curve is the

25. Why must profits be zero in long-run competitive equilibrium?

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