Question 1

In a perfectly competitive market, a firm's short-run supply curve is

Accepted Answer

In a perfectly competitive market, the firm's short-run supply curve is its marginal cost curve above the point of intersection with its average variable cost curve. This is because in the short-run, the fixed costs cannot be altered, so they are not considered in the supply decision. The supply decision is based on the variable costs, which are represented by the marginal cost curve. The firm will only produce if the price is equal to or greater than the marginal cost, and will produce at the level where marginal cost equals price. However, if the price is below the point where the marginal cost equals the average variable cost, the firm will shut down rather than produce at a loss.

Question 2

-In the above figure, if the market price is $8, the firm

Accepted Answer

Without a specific figure provided, we generally consider that if a firm's market price covers its average variable costs but not its total costs, it will continue to produce in the short run to cover some of its fixed costs, even though it incurs an economic loss. This is because shutting down would mean a loss equal to all fixed costs, whereas continuing production allows the firm to cover at least some fixed and variable costs.

Question 3

Assuming fixed factor prices, the short-run industry supply curve for a perfectly competitive industry is equal to the sum of the

Accepted Answer

In the short-run, firms in a perfectly competitive industry will only produce if the price is higher than their minimum AVC. Thus, the industry supply curve will be the total quantity supplied by all firms whose MC is higher than the minimum AVC. Therefore, the correct answer is C, which represents the sum of the MC curves (as they determine the quantity supplied) above the minimum AVC (as firms will not produce below this point).

Question 4

-In the above figure, if the market price is $10, the firm

Accepted Answer

The firm will produce at the point where marginal cost equals marginal revenue. At a market price of $10, the firm will produce 10 units.

Question 5

The short-run break-even price is

Accepted Answer

The short-run break-even price is the price at which a firm's total revenues equal its total costs. It is the point at which the firm is neither making a profit nor a loss. If the firm sets a price above the break-even price, it will make a profit, and if the price is set below the break-even price, the firm will incur losses. Therefore, it is important for the firm to know its break-even price to set the right price and make a profit.

Question 6

-Using the above figure, the perfectly competitive firm in the diagram will earn an economic profit if the market price is

Accepted Answer

The answer of 
-Using the above figure, the perfectly competitive...

Question 7

A firm is currently producing an output at which price equals the minimum point on the average variable cost curve. If wage rates increase, the firm will

Accepted Answer

If wage rates increase, it will raise the firm's variable costs. Continuing to produce at the minimum point on the AVC curve means that price is equal to the AVC, but it does not necessarily mean that price covers all variable costs. If variable costs increase, the price may no longer cover them, and so the firm will be making losses. Therefore, if the price stays the same, the firm will have to decrease its rate of output or shut down in the short run. As a result, option B is the best choice.

Question 8

-In the above figure, if the market price is less than $7, the firm

Accepted Answer

If the market price is less than $7, the firm will produce 0 units because it would not cover the variable costs, leading to a shutdown point.

Question 9

Suppose the price of an item in a perfectly competitive market is $2. For a firm in this market, MC = MR at an output of 100 units. The average total cost at this output level is $4 per unit, and TVC is $80. We may conclude that

Accepted Answer

The firm should continue to produce because the price ($2) is greater than the average variable cost ($0.8 = TVC/100), which means that the firm covers its variable costs and earns a contribution to fixed costs and profits. While the total cost ($400 = $320 + $80) is higher than total revenue (TR = $200 = $2*100), the firm can still minimize its losses by producing at the output where MC = MR, as this is the point where the difference between revenue and variable cost is the greatest. Shutting down would lead to a loss equal to the fixed cost, and other firms entering the industry is not relevant to the decision of this firm to continue producing in the short run.

Question 10

Suppose a perfectly competitive firm can produce 20,000 bushels of corn a year at an output at which marginal cost equals marginal revenue. The market price of corn per bushel is $2.00. The firm's total costs per year are $50,000 and fixed costs per year are $25,000. In the short run, this firm should

Accepted Answer

In the short run, the firm should produce 20,000 bushels of corn even if they are losing money, because they are covering their variable costs and making some contribution towards their fixed costs. Shutting down would cause them to lose the entire $50,000 in total costs. Producing more than 20,000 bushels would result in increasing marginal costs, thus decreasing economic profit. Therefore, the best option for the firm is to produce 20,000 bushels of corn.

Question 11

Suppose a perfectly competitive firm can produce 20,000 bushels of corn a year at an output at which marginal cost equals marginal revenue. The market price of corn per bushel is $1.00. The firm's total costs per year are $50,000 and fixed costs per year are $25,000. In the short run, this firm should

Accepted Answer

The answer of Suppose a perfectly competitive firm can produce...

Question 12

For a perfectly competitive firm facing the short-run break-even price

Accepted Answer

A firm facing the short-run break-even price is earning enough revenue to cover all its expenses, including both variable and fixed costs. This means that it is earning a normal profit, which is included in accounting profits, but not in economic profits. Therefore, the firm has zero economic profit in this situation. It does not necessarily need to shut down or expand production, but could continue to operate in the short run.

Question 13

If price is below average variable costs at all rates of output, the quantity supplied by a perfectly competitive firm will equal

Accepted Answer

If the price is below the average variable cost at all rates of output, then the firm will incur losses no matter how much it produces. In a perfectly competitive market, firms are profit maximizers and will only produce when they can cover their variable costs and earn a profit. Therefore, if they cannot cover their costs, they will produce zero output and shut down in the short run.

Question 14

Which of the following could generate economic profits for perfectly competitive firms in the short run, if they initially earn zero economic profits?

Accepted Answer

A decrease in input prices would decrease the firm's production costs, which would increase their profits in the short run. A fall in demand, a unit tax on output, or an increase in total fixed costs would all decrease profits or cause losses.

Question 15

-Using the above figure, the short-run break-even price for the perfectly competitive firm will be

Accepted Answer

The short-run break-even price for a perfectly competitive firm is the price at which total revenue equals total cost, allowing the firm to cover all its costs, including both variable and fixed costs, without making a profit or a loss. This is typically represented by the point where the firm's average total cost curve intersects with the market price. Since the specific figure is not provided, the explanation is based on standard economic theory.

Question 16

The break-even price for a perfectly competitive firm is the price that is equal to

Accepted Answer

The break-even price for a perfectly competitive firm is the price that covers all of the firm's costs, including both variable and fixed costs. At this price, the firm earns zero economic profit, but it is able to cover all of its costs and stay in business in the long run. The break-even price is determined by the minimum point on the average total cost (ATC) curve, where ATC is equal to price. Therefore, the best choice is B, which is ATC.

Question 17

The rising portion of a perfectly competitive firm's marginal cost curve, above the intersection with AVC, is its

Accepted Answer

The rising portion of a perfectly competitive firm's marginal cost curve, above the intersection with AVC, represents the portion of the firm's supply curve, where the price is higher than AVC and the firm is willing to produce the corresponding level of output. This is because the firm's marginal cost increases as it produces more output, and it will only produce output as long as the price covers the additional cost of production. Therefore, the rising portion of the marginal cost curve above the intersection with AVC represents the firm's minimum supply price or the minimum price necessary to cover variable and fixed costs in the short run.

Question 18

If a firm shuts down in the short run

Accepted Answer

A firm will incur its fixed costs if it shuts down in the short run. This is because fixed costs are inevitable regardless of whether the firm is producing or not. A firm can avoid its variable costs by shutting down, but it cannot avoid its fixed costs. Therefore, the firm will still incur these costs even if it shuts down.

Question 19

-Using the above figure, the perfectly competitive firm should shut down if the market price is below

Accepted Answer

The perfectly competitive firm should shut down if the market price is below P1 because at P1, the firm is making zero economic profit. If the market price falls below P1, the firm will be making a loss and should shut down.

Question 20

The perfectly competitive seller's short-run supply curve is

Accepted Answer

In the short-run, the perfectly competitive seller will produce as long as the price is above the average variable cost of production. This means that the short-run supply curve is the part of the marginal cost curve that is above the average variable cost curve. Therefore, choice (C) is the correct answer. The entire marginal cost curve (choice A) includes portions that are not profitable for the seller to produce at, while the marginal revenue curve (choice B) is not representative of the profit-maximizing output level. And while the part of the marginal cost curve above the average total cost curve (choice D) represents the profit-maximizing output in the long-run, this is not the case in the short-run.

Quiz 23: Perfect Competition