Question

1. A firm has market power if it can

a. maximize profits.

b. minimize costs.

c. influence the market price of the good it sells.

d. hire as many workers as it needs at the prevailing wage rate.

2. Which of the following is not a characteristic of a competitive market?

a. Buyers and sellers are price takers.

b. Each firm sells a virtually identical product.

c. Entry is limited.

d. Each firm chooses an output level that maximizes profits.

3. Suppose that a firm operating in perfectly competitive market sells 100 units of output. Its total revenues from the sale are $500. Which of the following statements is correct?

(i) Marginal revenue equals $5.

(ii) Average revenue equals $5.

(iii) Price equals $5.

a. (i) only

b. (iii) only

c. (i) and (ii) only

d. (i), (ii), and (iii)

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.

Answer 1

In a monopoly there is a single seller in the market, so it has market power to control the market and therefore it influences price and quantity in the market.

Hence this firm produces less at higher prices.

The barriers to entry are those factors which lead to restriction of entry by the new firms.

These are patent laws which restrict entry of new firms.

So when a firm has market power, it can influence the market price of the good it sells.

Hence option C is the correct answer.

2.

Since in the perfectly competitive firm, there are large number of buyers and sellers and they sell identical product and price is determined by industry and not by the firm. So any firm or any buyers can buy or sell any quantity of goods at the market price. It means there is no effect of the individual demand or supply of goods on the market price. It means production decisions cannot affect the market price. There is perfect information about the product to the buyers and sellers.

The profit-maximizing condition of perfectly competitive firm is

P=MC

Or

P>MC

Economic profit=(P-ATC)Q

There will be economic profit when P>ATC.

Hence it can be said that “entry is limited” is not a characteristics of competitive firm.

Hence option C is the correct answer.

3.

Since in the perfectly competitive firm, there are large number of buyers and sellers and they sell identical product and price is determined by industry and not by the firm. So any firm or any buyers can buy or sell any quantity of goods at the market price. It means there is no effect of the individual demand or supply of goods on the market price. It means production decisions cannot affect the market price. There is perfect information about the product to the buyers and sellers.

The profit-maximizing condition of perfectly competitive firm is

P=MC

Or

P>MC

Economic profit=(P-ATC)Q

There will be economic profit when P>ATC.

So when a firm is operating in perfectly competitive market sells 100 units of output. Its total revenues from the sale are $500.

Price=TR/Q

=500/100

=$5

P=MR=AR=$5

It means option (i), (ii) and (iii) are all correct.

Hence option d is the correct answer.

4.

Since in the perfectly competitive firm, there are large number of buyers and sellers and they sell identical product and price is determined by industry and not by the firm. So any firm or any buyers can buy or sell any quantity of goods at the market price. It means there is no effect of the individual demand or supply of goods on the market price. It means production decisions cannot affect the market price. There is perfect information about the product to the buyers and sellers.

The profit-maximizing condition of perfectly competitive firm is

P=MC

Or

P>MC

Economic profit=(P-ATC)Q

There will be economic profit when P>ATC.

If a competitive firm is currently producing a level of output at which marginal cost exceeds marginal revenue, then decreasing output would increase the firm’s profit. This is because profit will be maximized when MR and MC are equal.

Hence option C is the correct answer.