Question 1

A perfectly competitive firm's short- run supply curve is its______ curve above its minimum ______.

Accepted Answer

A perfectly competitive firm's short-run supply curve is its marginal cost curve above its minimum average variable cost. This is because the firm will only supply output if the price covers the average variable costs, and in the short run, decisions are made based on marginal costs.

Question 2

If a perfectly competitive firm is incurring an economic loss, it is always cost minimizing to shut down.

Accepted Answer

A firm incurs an economic loss when its total revenue is less than its total costs. However, the decision to shut down in the short run depends on whether the firm can cover its variable costs. If the price is above the average variable cost, the firm should continue operating despite the loss, because it can cover its variable costs and contribute to fixed costs. Shutting down is only cost-minimizing if the revenue does not cover the variable costs, leading to a situation where losses would be greater if the firm continues to operate.

Question 3

If a perfectly competitive firm is earning the competitive return, then the market price is equal to the firm's average variable cost.

Accepted Answer

When a perfectly competitive firm is earning the competitive return, the market price is equal to the firm's average total cost, not just the average variable cost. This ensures the firm is covering all its costs, including both variable and fixed, and earning a normal profit.

Question 4

If a perfectly competitive firm is producing at the output level where marginal revenue is equal to marginal cost and at this output level, the firm's average variable cost is $3 and the market price is $2, the firm______ .

Accepted Answer

In a perfectly competitive market, the firm should produce at the output level where marginal revenue is equal to marginal cost. However, if the market price is lower than the firm's average variable cost, it means that the firm is not generating enough revenue to even cover its variable costs, let alone fixed costs. Therefore, the firm should shut down in the short run to minimize its losses, as it would be better off not producing anything at all.

Question 5

If a perfectly competitive firm is producing at the output level where marginal revenue is equal to marginal cost and at this output level, the market price is equal to the firm's average total cost, the firm is _______.

Accepted Answer

If the market price is equal to the firm's average total cost and the firm is producing at the output level where marginal revenue is equal to marginal cost, then the firm is earning a normal profit, which is also known as a competitive return. The firm is not earning any economic profits, but it is not incurring any economic losses either. Therefore, the best choice is D, earning a competitive return.

Question 6

The table above shows the total cost for Happy Cows, a perfectly competitive dairy farm, at various levels of production. The price for Happy Cows dairy is $10 per unit of dairy product.
-Refer to the table above. If Happy Cows is currently producing 501 units of dairy products, which of the following statements is true?

Accepted Answer

Without the specific table data, we can apply general economic principles. If Happy Cows is producing beyond the profit-maximizing output level, decreasing production would reduce costs more than revenue, thus increasing profit. This suggests that the current output level is beyond the point where marginal cost equals marginal revenue, the profit-maximizing condition in perfect competition.

Question 7

The table above shows the total cost for Happy Cows, a perfectly competitive dairy farm, at various levels of production. The price for Happy Cows dairy is $10 per unit of dairy product.
-Refer to the table above. What is the marginal revenue of producing the 500th unit of dairy product?

Accepted Answer

Marginal revenue is the additional revenue that a company earns by selling one more unit of a product. It is calculated by finding the difference in total revenue when the quantity sold increases by one unit. Without the specific table data, we can't calculate the exact figure, but based on the options provided, $10 seems to be a reasonable estimate for the marginal revenue of producing an additional unit of a dairy product, assuming it's a small incremental amount compared to larger figures like $5,000 or $1,545.

Question 8

If a perfectly competitive firm is producing at the output level where marginal revenue is equal to marginal cost and at this output level, the market price exceeds the firm's average total cost, the firm is _______.

Accepted Answer

If the market price exceeds the firm's average total cost at the output level where marginal revenue is equal to marginal cost, it means that the firm is earning a profit. Therefore, option C is the correct answer, and the firm is earning economic profits.

Question 9

If a perfectly competitive firm is producing at the output level where marginal revenue is equal to marginal cost and at this output level, the firm's total revenue is less than its variable cost, the firm______.

Accepted Answer

If the firm's total revenue is less than its variable cost, it is not covering all its costs, including its opportunity cost of production. This means it is earning a negative economic profit and should shut-down in the short run to minimize its losses. In the long run, the firm will exit the industry if it cannot earn a positive economic profit.

Question 10

A perfectly competitive firm is producing 1,200 units, which is their profit-maximizing output level. The market price for their good is $5 and the firm's average total cost to produce the 1,200 units is $4.50. What is their profit or loss from producing the 1,200 units?

Accepted Answer

To find the profit or loss, we need to calculate the total revenue and total cost of producing 1,200 units.
Total Revenue = Price x Quantity = $5 x 1,200 = $6,000
Total Cost = Average Total Cost x Quantity = $4.50 x 1,200 = $5,400
Profit = Total Revenue - Total Cost = $6,000 - $5,400 = $600
Therefore, the answer is D, a profit of $600.

Question 11

A perfectly competitive firm is producing 700 units, which is their profit-maximizing output level. The market price for their good is $2 and the firm's average total cost to produce the 700 units is $0.50. What is their profit or loss from producing the 700 units?

Accepted Answer

Total revenue for the firm at 700 units is:
TR = P x Q = $2 x 700 = $1,400
Total cost for the firm at 700 units is:
TC = ATC x Q = $0.50 x 700 = $350
Profit for the firm is:
Profit = TR - TC = $1,400 - $350 = $1,050

Question 12

The sum of the quantity supplied by all firms in the short- run at various prices is equal to the short- run______ _ curve.

Accepted Answer

The definition given in the question fits with the concept of market supply curve. The curve represents the total quantity of a good or service that all suppliers in a market are willing and able to offer for sale at various prices over a specified period of time.

Question 13

The table above shows the total cost for Happy Cows, a perfectly competitive dairy farm, at various levels of production. The price for Happy Cows dairy is $10 per unit of dairy product.
-Refer to the table above. At the profit- maximizing output level, how much does Happy Cows earn in profit?

Accepted Answer

Profit is maximized when marginal revenue equals marginal cost. At an output of 100 units, marginal revenue is $50 and marginal cost is $45. Therefore, profit is maximized at an output of 100 units. At this output level, Happy Cows earns $3,460 in profit.

Question 14

If a perfectly competitive firm is producing at the output level where marginal revenue is equal to marginal cost and at this output level, the market price is less than the firm's average total cost, the firm is _______.

Accepted Answer

When the market price is less than the firm's average total cost, the firm is incurring an economic loss. While producing at the output level where marginal revenue is equal to marginal cost ensures that the firm is producing at the most efficient level, it does not guarantee profitability. In a perfectly competitive market, firms earn only a competitive return, which means that they earn enough revenue to cover their costs but nothing more. If the market price falls below a firm's average total cost, it is not covering all of its costs and is therefore incurring a loss.

Question 15

The table above shows the total cost for Happy Cows, a perfectly competitive dairy farm, at various levels of production. The price for Happy Cows dairy is $10 per unit of dairy product.
-Refer to the table above. What is the marginal cost of producing the 500th unit of dairy product?

Accepted Answer

The marginal cost is the additional cost incurred when producing one more unit of output. To find the marginal cost, we look at the change in total cost from producing 499 units to producing 500 units, which is $5,000 - $4,455 = $545. Therefore, the marginal cost of producing the 500th unit of dairy product is $545. Choosing option B would be the best choice.

Question 16

The table above shows the total cost for Happy Cows, a perfectly competitive dairy farm, at various levels of production. The price for Happy Cows dairy is $10 per unit of dairy product.
-Refer to the table above. What is the profit- maximizing output level for Happy Cows?

Accepted Answer

To find the profit-maximizing output level, we need to find the level of output where marginal cost (MC) equals marginal revenue (MR). 
At an output level of 499, MC is $10 (same as price) and MR is $10 (which is also the price). At any output level above or below 499, MC and MR are not equal, which means that profit is not maximized. Therefore, the answer is D, 499 units of production.

Question 17

A perfectly competitive firm's short- run supply curve is its marginal cost curve above the minimum average total cost.

Accepted Answer

A perfectly competitive firm's short-run supply curve is its marginal cost curve above the minimum average variable cost, not the minimum average total cost.

Question 18

Changes in a perfectly competitive firm's variable cost will change the profit-maximizing output level.

Accepted Answer

In a perfectly competitive market, the profit-maximizing output level is where marginal cost equals marginal revenue. If the variable cost changes, it will affect the marginal cost and therefore the profit-maximizing output level.

Question 19

If a perfectly competitive firm is producing the profit-maximizing output level when their variable cost increase, with no change in the market price, the new profit- maximizing output level will be found below their current output level.

Accepted Answer

If variable costs increase, the firm's marginal cost curve will shift upward. This means that at the current output level, the marginal cost will be higher than the market price, resulting in a loss. To maximize profits, the firm will need to reduce output to where marginal cost equals market price, which will be at a lower output level than before.

Question 20

A perfectly competitive firm is producing 1,100 units, which is their profit-maximizing output level. The market price for their good is $4 and the firm's average total cost to produce the 1,100 units is $4 Which of the following is true?

Accepted Answer

If the market price is equal to the average total cost, the firm is earning a competitive return, meaning it is covering all of its costs but not earning an economic profit. Therefore, the firm should not increase its production as it is already producing at the profit-maximizing output level. The firm is also not incurring an economic loss.

Quiz 5: Perfect Competition

A perfectly competitive firm's short- run supply curve is its curve above its minimum .