Practice Test: Firms in Competitive Markets

Question 1:

A firm has market power if it can ............
  1. minimize costs.
  2. influence the market price of the good it sells.
  3. maximize profits
  4. hire as many workers as it needs at the prevailing wage rate.
  5. 1 and 3
  6. none of the above


Question 2:

A key characteristic of a competitive market is that ................
  1. firms have price setting power
  2. firms minimize total costs.
  3. government antitrust laws do not regulate competition.
  4. producers sell almost identical products.


Question 3:

Which of the following is not a characteristic of a competitive market?
  1. Free entry is limited.
  2. Each firm chooses an output level that maximizes profits.
  3. Each firm sells a virtually identical product.
  4. Buyers and sellers are price takers.


Question 4:

Price discrimination is teh business of ........
  1. hiring marketing experts to increase consumers' brand loyalty.
  2. pricing above marginal cost.
  3. selling the same good at different prices to different customers.
  4. bundling related products to increase total sales.


Question 5:

In a competitive market, the actions of any single buyer or seller will ...............
  1. adversely affect the profitability of more than one firm in the market.
  2. affect marginal revenue and average revenue but not price.
  3. have little effect on market equilibrium quantity but will affect market equilibrium price.
  4. have a negligible impact on the market price.
  5. none of the above


Question 6:

Why does a firm in a competitive industry charge the market price?
  1. If a firm charges less than the market price, it loses potential revenue.
  2. If a firm charges more than the market price, it loses all its customers to other firms. .
  3. The firm can sell as many units of output as it want to at the market price.
  4. All of the above are correct.


Question 7:

If the market price is P1, in the short run, the perfectly competitive firm will earn.
perfectly-competitive-firm.jpg
  1. zero economic profits.
  2. positive economic profits.
  3. negative economic profits and will shut down.
  4. negative economic profits but will try to remain open.


Question 8:

If the market price is P2, in the short run, the perfectly competitive firm will earn
perfectly-competitive-firm-2.jpg
  1. zero economic profits.
  2. negative economic profits and will shut down.
  3. negative economic profits but will try to remain open.
  4. positive economic profits.
  5. none of the above


Question 9:

If the market price is P3, in the short run, the perfectly competitive firm will earn
perfectly-competitive-firm-3.jpg
  1. negative economic profits but will try to remain open.
  2. positive economic profits.
  3. zero economic profits.
  4. negative economic profits and will shut down.


Question 10:

If the market price is P4, in the short run, the perfectly competitive firm will earn
perfectly-competitive-firm-4.jpg
  1. negative economic profits but will try to remain open.
  2. positive economic profits.
  3. zero economic profits.
  4. negative economic profits and will shut down.
  5. none of the above


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