Question 1

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

Accepted Answer

Firms can influence the market price through advertising.

Question 2

In a perfectly competitive market, the demand curve facing an individual firm is:

Accepted Answer

Horizontal because the firm is a price taker and can sell any quantity at the market price.

Question 3

Suppose a wheat farmer in a perfectly competitive market increases their output. What happens to the market price of wheat?

Accepted Answer

The market price remains unchanged.

Question 4

A firm in a perfectly competitive market will maximize profit by producing the quantity where:

Accepted Answer

$$MR = MC$$

Question 5

If the market price is below a firm’s minimum average variable cost, what should the firm do in the short run?

Accepted Answer

Shut down and produce zero output.

Question 6

Which equation correctly represents a perfectly competitive firm’s total revenue?

Accepted Answer

$$TR = p 	imes Q$$

Question 7

In the short run, a competitive firm will continue to produce even if it is making losses as long as:

Accepted Answer

$$p \u003e AVC$$

Question 8

What is the long-run equilibrium condition for a perfectly competitive industry?

Accepted Answer

$$p = MC = LRAC$$

Question 9

If existing firms in a competitive industry are making positive economic profits, what will happen in the long run?

Accepted Answer

New firms will enter, increasing supply and lowering price.

Question 10

A competitive firm’s short-run supply curve is:

Accepted Answer

The portion of its marginal cost curve above average variable cost.

Question 11

Suppose a technological innovation lowers the cost of new plants in a competitive industry. In the long run, what is the likely outcome?

Accepted Answer

Market price will fall to the minimum ATC of new plants and output will increase.

Question 12

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

Accepted Answer

The price at which $$p = ATC$$ and firms earn zero economic profit.

Question 13

If a competitive firm is producing at a level where $$p  AVC$$, what is true in the short run?

Accepted Answer

The firm is making a loss but should continue to produce.

Question 14

Which of the following is a real-world example of a perfectly competitive market?

Accepted Answer

Wheat farming

Question 15

In the long run, if demand for a product in a competitive industry continually decreases, what is the most likely outcome?

Accepted Answer

Firms will exit the industry and capacity will shrink.

Question 16

Which of the following best explains why a hotel might stay open during the off-season even if it is not covering its total costs?

Accepted Answer

It can cover its variable costs and contribute to fixed costs.

Question 17

If a firm in a perfectly competitive market is producing at the output where $$MR \u003c MC$$, what should the firm do to maximize profit?

Accepted Answer

Decrease output.

Question 18

Which of the following is true about market power in a perfectly competitive market?

Accepted Answer

Firms have no market power and are price takers.

Question 19

The industry supply curve in a perfectly competitive market is:

Accepted Answer

The horizontal sum of all firms’ marginal cost curves above AVC.

Question 20

Which of the following is NOT a likely government response to a declining competitive industry?

Accepted Answer

Permanently subsidizing all firms to ensure positive profits.

Competitive Markets: Theory and Applications (Chapter 9 Study Notes)

Study Guide - Practice Questions