Question 1

In the long run,a firm earns zero economic profit,given the condition that

Accepted Answer

If a firm earns zero economic profit in the long run, it means that it is only covering all its costs, including its opportunity cost. This condition is met when the price (P) equals the average total cost (ATC), which includes both fixed and variable costs. Therefore, choice C (P = ATC) is the best answer. Choices A and D are related to short-run profit maximization, while choice B (P = AVC) only covers variable costs and ignores fixed costs.

Question 2

Marginal revenue is defined as

Accepted Answer

Marginal revenue is the change in total revenue that results from selling one additional unit of output. It is calculated by dividing the change in total revenue by the change in the quantity of output sold.

Question 3

Which of the following is the best example of a homogeneous good?

Accepted Answer

Wheat is the best example of a homogeneous good because all units of wheat are identical in terms of quality and characteristics. This means that one unit of wheat is interchangeable with another unit of wheat, regardless of the producer or location of origin. New cars, ice cream, and soft drinks are not homogeneous goods because there are variations in quality, brand, and flavor, among other factors.

Question 4

In perfect competition,the firm's marginal revenue curve is

Accepted Answer

In perfect competition, the firm's marginal revenue curve is perfectly elastic because the firm is a price taker and can sell any quantity at the market price. This makes the marginal revenue curve also the same as the firm's demand curve, as each additional unit sold brings in the same revenue as the previous one.

Question 5

The price charged by a perfectly competitive firm is determined by

Accepted Answer

In a perfectly competitive market, the price charged by a firm is determined by the market demand and market supply equilibrium. The firm has no control over the market price as it is a price taker. The firm can only produce at the price determined by the market equilibrium. Therefore, the correct answer is C.

Question 6

At the quantity where total revenue equals total cost,

Accepted Answer

At the quantity where total revenue equals total cost, there is no profit or loss to the firm. Therefore, the profit is zero at this point.

Question 7

In the theory of perfect competition,the assumptions of many buyers and sellers,the production of a homogeneous product,and the possession of all relevant information by buyers and sellers imply that the perfectly competitive firm

Accepted Answer

In a perfectly competitive market, the presence of many buyers and sellers, the production of a homogeneous product, and the possession of all relevant information imply that no single firm can influence the market price. This results in a perfectly elastic demand curve for the firm, meaning it can sell any quantity at the market price but cannot influence the price itself.

Question 8

In the theory of perfect competition,the assumption of easy entry into and exit from the market implies

Accepted Answer

In the long run, firms will enter or exit the market until economic profits are driven to zero. This is because if there are positive economic profits in the industry, more firms will enter, increasing supply and driving down prices until the profits are eliminated. Conversely, if there are losses in the industry, firms will exit, reducing supply and driving prices up until the losses are eliminated. Therefore, the assumption of easy entry and exit in the theory of perfect competition implies zero economic profits in the long run.

Question 9

If a firm is a price taker,its demand curve is

Accepted Answer

If a firm is a price taker, it means that it has no market power and must accept the market price as given. As a result, its demand curve is perfectly elastic, meaning that it can sell as much as it wants at the market price, but cannot charge a higher price without losing all of its sales.

Question 10

In a perfectly competitive industry,there is a motive for __________ to advertise in order to induce a rightward shift of the demand curve.

Accepted Answer

The answer of In a perfectly competitive industry,there is a...

Question 11

The perfectly competitive firm will shut down in the short run if price is

Accepted Answer

In the short run, a perfectly competitive firm will shut down if the price is less than the average variable cost, because it would not be able to cover its variable costs of production. If it continues to produce, it would incur losses greater than if it shut down. Therefore, it is better for the firm to shut down temporarily and minimize its losses.

Question 12

A perfectly competitive firm faces a __________ demand curve.

Accepted Answer

In a perfectly competitive market, there are many buyers and sellers, and firms have no market power to influence the price. As a result, the firm faces a perfectly elastic demand curve, meaning that it can sell any quantity at the market price but cannot charge a higher price without losing all of its customers. Any attempt to charge a higher price would result in buyers switching to a substitute product or switching to another producer in the market. Therefore, the firm must accept the market price as given and adjust its output to maximize profit.

Question 13

If an industry advertises,then it

Accepted Answer

The fact that an industry advertises does not necessarily indicate whether it is perfectly competitive or not. Industries may advertise even if they are perfectly competitive, to differentiate themselves from their competitors and attract more customers. Alternatively, an oligopoly or monopolistically competitive industry may advertise to create brand loyalty and discourage new firms from entering the market. Therefore, the answer is C as the industry could be perfectly competitive or not.

Question 14

Suppose one firm in a perfectly competitive industry experiences an increase in its costs of production.Which of the following best describes the most likely long run adjustment to this situation?

Accepted Answer

In a perfectly competitive industry, firms cannot increase the price of their products, as they are price takers. Therefore, if one firm experiences an increase in costs, it cannot pass on the cost to consumers through higher prices. This means the firm will earn lower profits, or even losses, in the short run. If the costs remain elevated in the long run, the firm may not be able to compete with other firms earning normal profits and may have to exit the industry.

Question 15

In the theory of perfect competition,the market demand curve is __________ and the firm's demand curve is __________.

Accepted Answer

In perfect competition, the market demand curve is downward sloping due to the law of demand, while the firm's demand curve is perfectly elastic because the firm is a price taker and can sell any quantity at the market price.

Question 16

Which of the following is not a characteristic of perfect competition?

Accepted Answer

A heterogeneous product is not a characteristic of perfect competition, as all firms must sell an identical or uniform product in perfect competition.

Question 17

Which of the following is a characteristic of perfect competition?

Accepted Answer

In perfect competition, buyers and sellers have all relevant information about the market, including prices, availability, and quality of products or services. The other choices do not fit the characteristics of perfect competition.

Question 18

In short-run equilibrium,the perfectly competitive firm may be making __________ economic profits.

Accepted Answer

In the short-run equilibrium, a perfectly competitive firm can be making positive economic profits if the market price is above the average total cost, zero economic profits if the market price equals the average total cost, or negative economic profits (losses) if the market price is below the average total cost.

Question 19

In long-run equilibrium,the perfectly competitive firm earns __________ economic profits.

Accepted Answer

In the long-run, firms in a perfectly competitive market will earn zero economic profits. This is because any positive profits will attract new firms to enter the market, which will increase competition and decrease prices, ultimately leading to zero profits for all firms in the long-run. Similarly, any negative profits (losses) will cause firms to exit the market, decreasing competition and increasing prices until all remaining firms are earning zero profits in the long-run.

Question 20

Which of the assumptions in the theory of perfect competition assures us that economic profit will be zero in the long run?

Accepted Answer

The assumption of easy entry and exit assures us that economic profit will be zero in the long run. When there are profits to be made in a market, new firms will enter, increasing supply and driving down prices until profits are reduced to zero. Conversely, when there are losses to be incurred, firms will exit the market, reducing supply and driving up prices until losses are reduced to zero. This process continues until firms earn only a normal rate of return and economic profit is eliminated.

Quiz 23: Perfect Competition