Question 1

Perfectly competitive firms will produce as long as marginal revenue exceeds marginal cost.

Accepted Answer

In a perfectly competitive market, firms will continue to produce output as long as the marginal revenue (MR) they receive from selling an additional unit of a good or service is greater than the marginal cost (MC) of producing that additional unit. This is because producing up to the point where MR = MC maximizes the firm's profit.

Question 2

Perfectly competitive firms minimize their losses by producing the output level where P = MR = AVC.

Accepted Answer

In perfect competition, firms minimize losses by producing where P = MR = MC, as long as P is greater than or equal to AVC. If P < AVC, the firm should shut down.

Question 3

The upward-sloping portion of the perfectly competitive firm's average variable cost curve is the firm's short run supply curve.

Accepted Answer

The upward-sloping portion of the firm's marginal cost curve, above the average variable cost curve, is the firm's short-run supply curve in perfect competition.

Question 4

Because of free entry and exit, firms in a perfectly competitive market cannot earn a profit in the short run.

Accepted Answer

In the short run, firms in a perfectly competitive market can earn profits due to factors like lower costs or higher market prices. However, in the long run, the entry of new firms erodes these profits, leading to normal profit levels.

Question 5

If, ceteris paribus, demand in a perfectly competitive industry increases, the market price for the product will also increase.

Accepted Answer

In a perfectly competitive market, if demand increases (ceteris paribus, meaning all other factors remain constant), the market price will increase due to the higher demand for the product outstripping the existing supply.

Question 6

For a perfectly competitive firm, when P = MC = ATC, the firm should reduce its output so as to increase its profits.

Accepted Answer

When P = MC = ATC in a perfectly competitive market, the firm is operating at the point where it maximizes profit, and any adjustment in output would lead to lower profits.

Quiz 8: Short-Run Costs and Output Decisions