Question 1

A perfectly competitive firm's demand curve

Accepted Answer

In perfect competition, a firm's demand curve is a horizontal line at the market price, which means P = AR = MR. This is because the firm is a price-taker and has no control over the market price. As a result, any increase in output will not affect the price, and the firm can sell as much as it wants to at the market price.

Question 2

Consider the following cost curves for Firm X, a perfectly competitive firm.  FIGURE 9- 3
-Refer to Figure 9- 3. In this industry, which one of the following is FALSE?

Accepted Answer

The statement "Only one firm can reach the size of output Q2" is false. In a perfectly competitive market, there are no barriers to entry or exit, and any firm can expand or reduce its output as long as it is profitable to do so. Therefore, multiple firms can reach the level of output Q2 if it is profitable for them to do so.

Question 3

Consider a perfectly competitive firm in the following position: output = 4000 units, market price =
$1, fixed costs = $2000, variable costs = $1000, and marginal cost = $1.10. To maximize profits the firm should

Accepted Answer

The firm should reduce its output because the marginal cost ($1.10) is greater than the market price ($1), indicating that producing additional units decreases profit.

Question 4

The demand curve facing a perfectly competitive firm depends on

Accepted Answer

In a perfectly competitive market, the demand curve facing an individual firm is determined by the intersection of market demand and market supply, which sets the market price that the firm takes as given.

Question 5

Consider the following total cost schedule for a perfectly competitive firm producing ball- point pens. $$\begin{array}{l}
\begin{array} { | l | l | l | } 
\hline \begin{array} { l } 
\text { Output } \
\text { per period }
\end{array} & \text { TVC } ( \$ ) & \text { TFC } ( \$ ) \
\hline 0 & 0 & 5 \
\hline 10 & 2 & 5 \
\hline 20 & 3 & 5 \
\hline 30 & 6 & 5 \
\hline 40 & 10 & 5 \
\hline 50 & 15 & 5 \
\hline
\end{array}\
\text { TABLE 9- } 3
\end{array}$$
-Refer to Table 9- 3. If this firm were producing at an output level of 30 units, the AFC would be
And the AVC would be .

Accepted Answer

AFC (Average Fixed Cost) is calculated as TFC divided by output, which is $5/30 = $0.17. AVC (Average Variable Cost) is calculated as TVC divided by output, which is $6/30 = $0.20.

Question 6

A perfectly competitive firm facing a price of $4.00 is currently producing an output level where average variable cost is $2.00, average total cost is $4.00, and marginal cost is $3.00. In order to maximize profits, this firm should

Accepted Answer

The firm should increase output because it is currently producing at a level where its marginal cost ($3.00) is less than the market price ($4.00). This means that each additional unit produced will contribute more to revenue than to costs, increasing the firm's profits.

Question 7

If a perfectly competitive firm is faced with average revenue below average variable cost it will shut down so as to reduce its

Accepted Answer

When a firm's average revenue is below its average variable cost, it cannot cover its variable costs, and it will shut down to avoid incurring further losses. By shutting down, the firm reduces its losses to the amount of its fixed costs, as it no longer incurs variable costs.

Question 8

The perfectly elastic demand curve faced by a competitive firm means that

Accepted Answer

In a perfectly competitive market, a firm faces a perfectly elastic demand curve, meaning it can sell any quantity of output at the market price without affecting the price.

Question 9

For a given market price, a competitive firm's marginal- revenue curve

Accepted Answer

In a perfectly competitive market, a firm's marginal revenue is equal to the market price, which is also the firm's demand curve.

Question 10

Which of the following statements about a perfectly competitive industry in long- run equilibrium is true?

Accepted Answer

In the long-run equilibrium of a perfectly competitive industry, each firm will be producing at the minimum point on its long-run average cost (LRAC) curve. This means that they are producing at the most efficient level possible given their size and technology. Therefore, they have no incentive for further technological improvements, as they are already producing at the lowest possible cost. Additionally, firms cannot make economic profit, only normal profit, in the long-run equilibrium of a perfectly competitive industry. Losses may be tolerable due to high fixed costs, but they cannot persist in the long-run. Economies of scale may exist, but they are not a requirement for a perfectly competitive industry in long-run equilibrium.

Question 11

Suppose that in a perfectly competitive industry, the market price of the product is $27. A firm is producing the output level at which average total cost equals marginal cost, both of which are $25. Average variable cost is $23. To maximize profits in the short run, the firm should

Accepted Answer

The answer of Suppose that in a perfectly competitive industry,...

Question 12

Consider the following total cost schedule for a perfectly competitive firm producing ball- point pens. $$\begin{array}{l}
\begin{array} { | l | l | l | } 
\hline \begin{array} { l } 
\text { Output } \
\text { per period }
\end{array} & \text { TVC } ( \$ ) & \text { TFC } ( \$ ) \
\hline 0 & 0 & 5 \
\hline 10 & 2 & 5 \
\hline 20 & 3 & 5 \
\hline 30 & 6 & 5 \
\hline 40 & 10 & 5 \
\hline 50 & 15 & 5 \
\hline
\end{array}\
\text { TABLE 9- } 3
\end{array}$$
-Refer to Table 9- 3. Suppose the prevailing market price for this firm's product is $0.40. The profit- maximizing level of output for this firm is between

Accepted Answer

The answer of Consider the following total cost schedule for...

Question 13

Suppose a typical competitive firm has the following data in the short run: price = $10; output =
100 units; ATC = $8; AVC = $7. What will likely happen?

Accepted Answer

The firm is making an economic profit because the price ($10) is greater than the average total cost (ATC) of $8. This will likely attract new firms to enter the industry in the long run, leading to expansion.

Question 14

Consider the total cost and revenue curves shown below, for two perfectly competitive firms, Firm A and Firm B.  FIGURE 9- 5
-Refer to Figure 9- 5. Given its total cost and revenue curves, Firm B should

Accepted Answer

Firm B should produce the level of output where the slope of the TC curve is equal to the slope of the TR curve. This is the level of output where marginal cost equals marginal revenue, which maximizes profits. At any lower level of output, the firm would not be covering its variable costs and would be better off shutting down temporarily (A). At any higher level of output, the firm would have increasing marginal costs exceeding marginal revenue, which would result in losses (C). Exiting the industry (E) is not a viable option based on the information provided.

Question 15

Suppose that in a perfectly competitive industry, the market price of the product is $6. A firm is producing the output level at which average total cost equals marginal cost, both of which are $8. Average variable cost is $4. To maximize its profits in the short run, the firm should

Accepted Answer

The answer of Suppose that in a perfectly competitive industry,...

Question 16

Consider the following cost curves for Firm X, a perfectly competitive firm.  FIGURE 9- 3
-Refer to Figure 9- 3. If Firm X has a capital stock that generates SRATC1, then in the long run Firm X will have to

Accepted Answer

In the long run, firms must operate at the minimum point of their long-run average total cost curve. If Firm X is not at this point, it must either expand its plant size to achieve lower costs or exit the industry if it cannot compete effectively.

Question 17

Consider the following short- run cost curves for a perfectly competitive firm.  FIGURE 9- 1
-Refer to Figure 9- 1. The diagram shows cost curves for a perfectly competitive firm. If the market price is P4, the profit- maximizing firm in the short run should produce output

Accepted Answer

The answer of Consider the following short- run cost curves...

Question 18

Consider the textile industry, which we assume to be a competitive industry, and which experiences continuous cost- reducing technological change. Which of the following statements best describes this industry?

Accepted Answer

The answer of Consider the textile industry, which we assume...

Question 19

Consider the total cost and revenue curves shown below, for two perfectly competitive firms, Firm A and Firm B.  FIGURE 9- 5
-Refer to Figure 9- 5. If both Firms A and B are producing a level of output such that the slope of the TC curve is equal to the slope of the TR curve,

Accepted Answer

The answer of Consider the total cost and revenue curves...

Question 20

When a perfectly competitive firm is at its profit- maximizing level of output, it

Accepted Answer

In perfect competition, a firm maximizes profit where marginal cost (MC) equals marginal revenue (MR), which is also the price (P). At this point, the firm may be making a profit if price is above average total cost (ATC), or incurring a loss if price is below ATC.

Quiz 9: Competitive Markets

A perfectly competitive firm's demand curve

Consider the following cost curves for Firm X, a perfectly competitive firm. FIGURE 9- 3 -Refer to Figure 9- 3. In this industry, which one of the following is FALSE?

Consider a perfectly competitive firm in the following position: output = 4000 units, market price = $1, fixed costs = $2000, variable costs = $1000, and marginal cost = $1.10. To maximize profits the firm should

The demand curve facing a perfectly competitive firm depends on

A perfectly competitive firm facing a price of $4.00 is currently producing an output level where average variable cost is $2.00, average total cost is $4.00, and marginal cost is $3.00. In order to maximize profits, this firm should

If a perfectly competitive firm is faced with average revenue below average variable cost it will shut down so as to reduce its

The perfectly elastic demand curve faced by a competitive firm means that

For a given market price, a competitive firm's marginal- revenue curve

Which of the following statements about a perfectly competitive industry in long- run equilibrium is true?

Suppose that in a perfectly competitive industry, the market price of the product is $27. A firm is producing the output level at which average total cost equals marginal cost, both of which are $25. Average variable cost is $23. To maximize profits in the short run, the firm should

Suppose a typical competitive firm has the following data in the short run: price = $10; output = 100 units; ATC = $8; AVC = $7. What will likely happen?

Consider the total cost and revenue curves shown below, for two perfectly competitive firms, Firm A and Firm B. FIGURE 9- 5 -Refer to Figure 9- 5. Given its total cost and revenue curves, Firm B should

Suppose that in a perfectly competitive industry, the market price of the product is $6. A firm is producing the output level at which average total cost equals marginal cost, both of which are $8. Average variable cost is $4. To maximize its profits in the short run, the firm should

Consider the following cost curves for Firm X, a perfectly competitive firm. FIGURE 9- 3 -Refer to Figure 9- 3. If Firm X has a capital stock that generates SRATC1, then in the long run Firm X will have to

Consider the following short- run cost curves for a perfectly competitive firm. FIGURE 9- 1 -Refer to Figure 9- 1. The diagram shows cost curves for a perfectly competitive firm. If the market price is P4, the profit- maximizing firm in the short run should produce output

Consider the textile industry, which we assume to be a competitive industry, and which experiences continuous cost- reducing technological change. Which of the following statements best describes this industry?

Consider the total cost and revenue curves shown below, for two perfectly competitive firms, Firm A and Firm B. FIGURE 9- 5 -Refer to Figure 9- 5. If both Firms A and B are producing a level of output such that the slope of the TC curve is equal to the slope of the TR curve,

When a perfectly competitive firm is at its profit- maximizing level of output, it