Question 1

Suppose,at its present rate of output,a perfectly competitive firm's marginal revenue exceeds both its marginal cost and its average variable cost.To maximize profit,the firm should

Accepted Answer

Since the firm's marginal revenue exceeds both its marginal cost and average variable cost, it means that the firm is operating at a point where it can make more profit by producing more units. Thus, the best choice would be to increase output to maximize its profit.

Question 2

Suppose that,in the short run,a perfectly competitive firm earns a normal profit.Which of the following is incorrect?

Accepted Answer

If a perfectly competitive firm is earning a normal profit in the short run, then its price must be equal to its average total cost (ATC). Therefore, option B is correct. In addition, option A is also correct since the firm's marginal revenue (MR) would also be equal to the price. Option C is a restatement of the revenue equation, so it is also correct. Option D is not necessarily true because the firm could be earning a positive economic profit in the short run, which would mean that TR > TC. However, option E is incorrect because in order for a firm to earn a normal profit, its price must be equal to its ATC, not its average variable cost (AVC).

Question 3

What is always true at the quantity at which average total cost equals average revenue?

Accepted Answer

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Question 4

A perfectly competitive firm is currently producing where price is $8 and both marginal cost and average variable cost are $9.To maximize profit or minimize loss in the short run,this firm should

Accepted Answer

In the short run, a perfectly competitive firm should only produce if the price is equal to or greater than the minimum average variable cost. Since the price is currently $8, which is lower than both the average variable cost and the marginal cost, the firm is incurring losses. The best choice for the firm in this situation is to shut down and avoid incurring any further losses.

Question 5

A perfectly competitive firm in the short run determines its quantity supplied at various prices by using

Accepted Answer

In the short run, a perfectly competitive firm determines its quantity supplied at various prices by producing where marginal cost equals marginal revenue, as long as price is greater than or equal to average variable cost. Therefore, the relevant portion of the marginal cost curve is the portion that rises above the average variable cost curve. Thus, the answer is B.

Question 6

If two perfectly competitive firms produce the same quantity at the market price,then,at that quantity,they must have the same

Accepted Answer

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Question 7

In the short run,a perfectly competitive firm suffering a loss

Accepted Answer

In the short run, a perfectly competitive firm suffering a loss will compare the market price (P) with the average variable cost (AVC) of production. If the price is lower than the average variable cost, the firm will not be able to cover its variable costs, and it will face a loss on every unit produced. Therefore, it will be better for the firm to shut down and incur a loss equal to its fixed costs rather than making a loss equal to the difference between price and variable cost on every unit produced. Hence, the firm will close if P < AVC.

Question 8

A perfectly competitive firm has a horizontal supply curve in the short run.

Accepted Answer

In the short run, a perfectly competitive firm's supply curve is upward sloping, not horizontal, because the firm has some fixed costs that cannot be adjusted in the short run. If the price offered in the market is equal to or greater than the minimum average variable cost, the firm will produce the profit-maximizing quantity, shown on the upward-sloping portion of the marginal cost curve.

Question 9

When marginal revenue equals marginal cost,the firm just "breaks even."

Accepted Answer

When marginal revenue equals marginal cost, the firm is not just "breaking even." It is actually maximizing its profit. "Breaking even" would occur when total revenue equals total cost.

Question 10

In the short run,a perfectly competitive firm will always shut down if,at all output levels above zero,

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Question 11

A perfectly competitive firm finds that:
Average total cost is $25;
Average variable cost is $15;
Marginal cost is $20 and increasing;
Price of the product is $22.
This firm should

Accepted Answer

The answer of A perfectly competitive firm finds that:
Average total...

Question 12

A firm in perfect competition produces 15 widgets and sells them for a total revenue of $300.At this level of output,the average total cost is $25 per unit,and the average variable cost is $24 per unit.To maximize profit (or minimize loss),this firm should produce:

Accepted Answer

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Question 13

To maximize profit,a perfectly competitive firm that decides not to shut down will choose the rate of output at which

Accepted Answer

In a perfectly competitive market, firms take the market price as given and can sell as much output as they want at that price. Therefore, to maximize profit, the firm will choose the rate of output at which price equals marginal cost (MC), because at that point the firm is producing the last unit of output that is valued more than the cost of producing it. If the firm were to produce more than this level of output, the cost of producing the additional units would be greater than the revenue earned from selling them, which would decrease the firm's profits. Therefore, the profit-maximizing level of output is where price equals MC.

Question 14

A perfectly competitive firm producing 100 units of output per period finds that:
Average total cost is $20;
Average variable cost is $12;
Marginal cost is $18 and increasing;
Price of the product is $15.
This firm should

Accepted Answer

The answer of A perfectly competitive firm producing 100 units...

Question 15

The short-run industry supply curve in a perfectly competitive market is the horizontal sum of each firm's short-run supply curve.

Accepted Answer

In perfect competition, each firm's short-run supply curve is equal to its marginal cost curve above its minimum average variable cost. The industry supply curve is the horizontal sum of these individual supply curves, meaning that it represents the quantity that all firms in the industry are willing and able to produce at different prices. Therefore, the statement is true.

Question 16

The perfectly competitive firm's short-run supply curve is the same as the

Accepted Answer

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Question 17

The price that represents the shutdown point for a perfectly competitive firm is the

Accepted Answer

The shutdown point for a perfectly competitive firm is where the price equals the minimum average variable cost, as the firm will incur losses if it produces any output below this point. Therefore, the lowest point on the average variable cost curve represents the firm's shutdown point, making option D the correct answer.

Question 18

The significance of the minimum point on the average variable cost curve is that

Accepted Answer

The minimum point on the average variable cost curve is known as the shutdown point, which indicates the level of output at which producing any units beyond this point would result in losses for the firm. At this point, the average variable cost is equal to the price, so the firm is indifferent between producing at a loss or shutting down. Therefore, option C is the correct answer. Option A is incorrect because the profit-maximizing level is determined by comparing marginal cost with marginal revenue, not by looking at the minimum point on the AVC curve. Option B is incorrect because the selling price is not determined by the minimum point on the AVC curve. Option D is incorrect because the relationship between AVC and MC does not determine the significance of the minimum point on the AVC curve. Option E is incorrect because the minimum point on the AVC curve does not show the amount of total cost.

Question 19

A perfectly competitive firm will produce at an economic loss (negative profit) in the short run rather than discontinue production if there is a rate of output at which price

Accepted Answer

In the short run, a perfectly competitive firm will continue to produce as long as the price exceeds the average variable cost (AVC), even if it is making an economic loss. This is because the firm can cover its variable costs and contribute towards paying off its fixed costs. If the price falls below the AVC, however, the firm will shut down production in the short run to minimize its loss. Therefore, option A (exceeds average variable cost) is the correct choice.

Question 20

A perfectly competitive firm will produce at an economic loss in the short run rather than discontinue production if there is a rate of output at which

Accepted Answer

The answer of A perfectly competitive firm will produce at...

Quiz 8: Perfect Competition