Question 1

In response to an increase in the market demand, to maximize short- run profits, managers of perfectly competitive firms will _______ production and move______ along the marginal cost curve.

Accepted Answer

In response to an increase in market demand, managers of perfectly competitive firms will increase production to meet the higher demand and, as a result, move upward along the marginal cost curve to a new equilibrium point where marginal cost equals the new, higher market price.

Question 2

Perfectly competitive firms are earning economic profits at a market price of $6 and an average total cost of $5. If new firms enter and increase the average total cost for all firms, the market price will ________ until ______.

Accepted Answer

When new firms enter and increase the average total cost for all firms, the supply curve for the market shifts to the right. This causes the market price to fall until it reaches the new higher average total cost. Therefore, the correct choice is D.

Question 3

Perfectly competitive firms are earning economic profits at a market price of $10 and an average total cost of $8. If new firms enter and increase the average total cost for all firms, the market price will _ _______ until _ ______.

Accepted Answer

In a perfectly competitive market, if firms are earning economic profits, new firms will enter the market. This increases supply, leading to a decrease in the market price. The process continues until economic profits are zero, meaning price equals average total cost.

Question 4

At its current level of quantity, a perfectly competitive firm's marginal revenue is $3.25, its short- run marginal cost is $3.25 and its long- run marginal cost is $3.25. Which of the following statements is true?

Accepted Answer

If the perfectly competitive firm's marginal revenue is equal to its marginal cost, it is maximizing its profit. In this case, the firm is maximizing both its short-run and long-run profit because its marginal revenue is equal to its short-run and long-run marginal costs.

Question 5

If at its current production level, a perfectly competitive firm's marginal revenue and long- run marginal cost are equal to $1.50 and its long- run average cost is $1.50, which of the following statements is true?

Accepted Answer

In a perfectly competitive market, firms earn zero economic profit in the long-run, as new firms enter the market driving down prices until price equals long-run average cost. Since the long-run average cost for this firm is $1.50 and its marginal revenue and long-run marginal cost are also $1.50, the firm is operating at its break-even point and earning zero economic profit. Therefore, choice A is true, and choices B, C, and D are incorrect.

Question 6

At its current level of quantity, a perfectly competitive firm's marginal revenue is $3.25, its short- run marginal cost is $3.25 and its long- run marginal cost is $3.00. Which of the following statements is true?

Accepted Answer

In order to maximize short-run profit, a firm should produce at the quantity where short-run marginal cost equals marginal revenue. Since the marginal cost and marginal revenue are both $3.25, the firm is already producing at the profit-maximizing quantity. However, in the long-run, the firm should aim to produce at the quantity where long-run marginal cost equals marginal revenue. Since the long-run marginal cost is lower than the current price, the firm has an incentive to decrease production in the long-run to increase profit. Therefore, the firm is maximizing its short-run profit, but not its long-run profit.

Question 7

In a perfectly competitive market, a decrease in the market demand will shift the perfectly competitive firm's______ curve______ .

Accepted Answer

In a perfectly competitive market, the individual firm is a price taker and the market demand curve is the demand curve facing the firm. Therefore, a decrease in the market demand curve will lead to a decrease in the demand for the firm's product, which will shift the firm's demand curve downward. The marginal cost curve is not influenced by changes in market demand, so option A is incorrect. Similarly, an upward shift in the demand curve would imply an increase in demand for the firm's product, so option B is also incorrect.

Question 8

Perfectly competitive firms are earning economic profits at a market price of $5 and an average total cost of $4. If new firms enter and do not affect the cost for all firms, the market price will ______until it reaches______ .

Accepted Answer

With the entry of new firms, the supply in the market will increase, leading to a decrease in the market price. This is because there will be more firms producing at a lower cost than the existing firms, and the increased competition will force prices down. Eventually, the market price will fall to the point where it is equal to the average total cost of all firms, which in this case is $4. So the market price will fall until it reaches $4.

Question 9

In a perfectly competitive market, an increase in the market demand will shift the perfectly competitive firm's______ curve______ .

Accepted Answer

In a perfectly competitive market, each firm faces a horizontal demand curve. Therefore, an increase in the market demand will lead to a higher price for the firm's product. This, in turn, will cause the firm's demand curve to shift upward, as it can now sell more at the higher price. The firm's marginal cost curve will remain the same, assuming there are no changes in input prices or technology.

Question 10

If a perfectly competitive firm is producing an output level that sets its marginal revenue equal to its short- run marginal cost (MR = MC)and its long- run marginal cost (MR = LMC), the firm______ .

Accepted Answer

When a perfectly competitive firm produces an output level where MR=MC, it maximizes its short-run profit. However, to also maximize its long-run profit, the firm needs to ensure that MR=LMC. Therefore, if the firm is producing an output level that sets both MR=MC and MR=LMC, it is maximizing both its short-run and long-run profit.

Question 11

In response to an increase in the market demand, to maximize short- run profits, managers of perfectly competitive firms will______ _ production by employing______ inputs.

Accepted Answer

In a perfectly competitive market, firms are price-takers and have no control over the market price. Therefore, to maximize profits in the short run, they need to increase production as long as marginal revenue is greater than marginal cost. This means they should employ more variable inputs to increase output, rather than increasing fixed inputs, which would require a longer time horizon and higher costs. Additionally, decreasing production by employing less variable inputs would result in lower profits, as long as the marginal revenue is greater than the marginal cost. Therefore, the best choice is to increase production by employing more variable inputs.

Question 12

If at its current production level, a perfectly competitive firm's marginal revenue and long- run marginal cost are equal to $0.50 and its long- run average cost is $0.35, which of the following statements is true?

Accepted Answer

Since the long-run marginal cost is equal to the long-run average cost, the firm is currently producing at its efficient scale. However, if the market price remains at $0.50, the firm will only break even in the long run. Therefore, the firm should expect the market price of its product to fall, as other firms may also enter the industry, increasing the supply and driving down the price.

Question 13

In a perfectly competitive market, an increase in the market demand will shift the perfectly competitive firm's______ curve______ .

Accepted Answer

In a perfectly competitive market, a firm is a price taker and therefore its demand curve is perfectly elastic or horizontal. An increase in the market demand would increase the price that the firm can charge, leading to an upward shift in the marginal revenue curve. The firm will produce where marginal cost equals marginal revenue, which will also shift upward in response to the increased price. Therefore, choice B is the correct answer.

Question 14

At its current level of quantity, a perfectly competitive firm's marginal revenue is $2.50, its short- run marginal cost is $2.50 and its long- run marginal cost is $2.00. Which of the following statements is true?

Accepted Answer

In the short-run, the firm should continue to produce as long as its marginal cost equals or is less than its marginal revenue, which is the case here. However, in the long-run, the firm should adjust its level of output such that its marginal cost equals its marginal revenue, which is $2.00, not $2.50. Therefore, the firm is not maximizing its long-run profit and should adjust its production in the long-run to do so.

Question 15

If at its current production level, a perfectly competitive firm's marginal revenue and long- run marginal cost are equal to $5 and its long- run average cost is $4, which of the following statements is true?

Accepted Answer

The answer of If at its current production level, a...

Question 16

Perfectly competitive firms are earning economic profits at a market price of $18 and an average total cost of $15. If new firms enter and increase the average total cost for all firms, the market price will _______ until _______ .

Accepted Answer

When new firms enter and increase the average total cost for all firms, the supply curve shifts to the right causing a decrease in the market price. As a result, the economic profits of the existing firms decreases until it reaches zero. The market price will continue to fall until it reaches the new higher average total cost for all firms. Therefore, choice (D) is the correct answer.

Question 17

In response to a decrease in the market demand, to maximize short- run profits, managers of perfectly competitive firms will______ _ production and move______ along the marginal cost curve.

Accepted Answer

In a perfectly competitive market, individual firms have no power to influence the market price, so they can only maximize short-run profits by producing where marginal cost equals market price. If the market demand decreases, the market price will also decrease. To maintain the profit-maximizing level of output, firms need to decrease their production to reduce costs and move downward along the marginal cost curve. Therefore, Choice A is correct.

Question 18

In a perfectly competitive market, a decrease in the market demand will shift the perfectly competitive firm's______ curve______ .

Accepted Answer

In a perfectly competitive market, a decrease in market demand implies that the market price will decrease. As the market price decreases, the marginal revenue curve of a perfectly competitive firm will also decrease. Therefore, an decrease in market demand will shift the perfectly competitive firm's marginal revenue curve down.

Question 19

If at its current production level, a perfectly competitive firm's marginal revenue and long- run marginal cost are equal to $1.50 and its long- run average cost is $1.65, which of the following statements is true?

Accepted Answer

The answer of If at its current production level, a...

Question 20

In response to a decrease in the market demand, to maximize short- run profits, managers of perfectly competitive firms will_______production by employing ______inputs.

Accepted Answer

In a perfectly competitive market, when demand decreases, firms will reduce production to avoid producing surplus goods that cannot be sold. They achieve this by employing fewer variable inputs (like labor or raw materials), which can be adjusted more easily and quickly than fixed inputs (like machinery or land).

Quiz 5: Perfect Competition

In response to an increase in the market demand, to maximize short- run profits, managers of perfectly competitive firms will _ production and move along the marginal cost curve.

Perfectly competitive firms are earning economic profits at a market price of $6 and an average total cost of $5. If new firms enter and increase the average total cost for all firms, the market price will __ until .

Perfectly competitive firms are earning economic profits at a market price of $10 and an average total cost of $8. If new firms enter and increase the average total cost for all firms, the market price will _ _______ until _ ______.

At its current level of quantity, a perfectly competitive firm's marginal revenue is $3.25, its short- run marginal cost is $3.25 and its long- run marginal cost is $3.25. Which of the following statements is true?

If at its current production level, a perfectly competitive firm's marginal revenue and long- run marginal cost are equal to $1.50 and its long- run average cost is $1.50, which of the following statements is true?

At its current level of quantity, a perfectly competitive firm's marginal revenue is $3.25, its short- run marginal cost is $3.25 and its long- run marginal cost is $3.00. Which of the following statements is true?

In a perfectly competitive market, a decrease in the market demand will shift the perfectly competitive firm's curve .

Perfectly competitive firms are earning economic profits at a market price of $5 and an average total cost of $4. If new firms enter and do not affect the cost for all firms, the market price will until it reaches .

In a perfectly competitive market, an increase in the market demand will shift the perfectly competitive firm's curve .

If a perfectly competitive firm is producing an output level that sets its marginal revenue equal to its short- run marginal cost (MR = MC) and its long- run marginal cost (MR = LMC) , the firm______ .