Question 1

Which of the following is NOT an assumption of a perfectly competitive market?

Accepted Answer

Each firm can influence the market price of its product.

Question 2

Suppose a wheat farmer in a perfectly competitive market increases his output by 10%. What is the most likely effect on the market price?

Accepted Answer

The market price will remain essentially unchanged.

Question 3

A competitive firm’s supply curve in the short run is best described as:

Accepted Answer

Its marginal cost curve above the average variable cost curve.

Question 4

If a firm in a perfectly competitive market faces a market price below its average variable cost, what should it do in the short run?

Accepted Answer

Shut down production immediately.

Question 5

Which equation correctly represents the profit ($$\pi) of a $$competitive firm?

Accepted Answer

$$\pi = TR - TC$$

Question 6

In the long run, what happens in a competitive industry if existing firms are earning positive economic profits?

Accepted Answer

New firms will enter the industry, increasing supply and lowering price.

Question 7

A hotel stays open during the off-season even though its revenue does not cover total costs. According to economic theory, why might this be rational?

Accepted Answer

Because the hotel can cover its variable costs and contribute to fixed costs.

Question 8

Which of the following best describes the demand curve faced by a single firm in a perfectly competitive market?

Accepted Answer

Perfectly elastic at the market price.

Question 9

If a competitive firm is producing at a level where $$p = MC \u003e ATC$$, what is the firm’s economic profit?

Accepted Answer

Positive economic profit.

Question 10

In the long-run equilibrium of a perfectly competitive industry, which of the following conditions must be met?

Accepted Answer

Firms are producing at the minimum point of their LRAC curve and earning zero economic profit.

Question 11

Suppose a technological innovation lowers the cost of new plants in a competitive industry. What is the likely sequence of events?

Accepted Answer

New plants earn economic profits, attracting entry, which increases supply and lowers price.

Question 12

Which of the following equations correctly defines marginal revenue ($$MR) $$for a competitive firm?

Accepted Answer

$$MR = \frac{\Delta TR}{\Delta Q}$$

Question 13

A competitive firm is currently producing where $$p = MC = ATC. $$What is true about the firm’s profit?

Accepted Answer

The firm is breaking even (zero economic profit).

Question 14

Which of the following best explains why individual firms in a perfectly competitive market are price takers?

Accepted Answer

Each firm’s output is small relative to the market, so changes in its output do not affect market price.

Question 15

If the market price falls below a competitive firm’s minimum average variable cost, what is the firm’s profit-maximizing output?

Accepted Answer

Produce zero output (shut down).

Question 16

In the short run, a competitive firm will continue to produce as long as:

Accepted Answer

$$TR \u003e TVC$$

Question 17

Which of the following is the correct formula for average revenue ($$AR) $$for a competitive firm?

Accepted Answer

$$AR = \frac{TR}{Q}$$

Question 18

If a competitive industry experiences a continual decrease in demand, what is the likely long-run outcome?

Accepted Answer

Firms will exit the industry, reducing supply and raising price until zero economic profit is restored.

Question 19

Which of the following best describes the break-even price in a perfectly competitive industry?

Accepted Answer

The price at which a firm covers all costs, including opportunity cost of capital.

Question 20

In a perfectly competitive market, the industry supply curve is derived by:

Accepted Answer

Horizontally summing the marginal cost curves above AVC for all firms.

Competitive Markets: Structure, Behavior, and Equilibrium (Chapter 9 Study Notes)

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