$$\text{Profit} = (P - ATC) \times Q$$

Question 1

Which of the following is NOT a characteristic of a perfectly competitive market?

Accepted Answer

There are significant barriers to entry.

Question 2

Why does a perfectly competitive firm face a horizontal demand curve?

Accepted Answer

Because the firm is too small to affect the market price.

Question 3

In a perfectly competitive market, what is the relationship between price (P), average revenue (AR), and marginal revenue (MR)?

Accepted Answer

$$P = AR = MR$$

Question 4

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

Accepted Answer

$$MR = MC$$

Question 5

Suppose a firm in a perfectly competitive market is producing at a level where $$P  AVC. $$What should the firm do in the short run?

Accepted Answer

Continue producing to minimize losses.

Question 6

If the market price falls below the minimum point of the average variable cost (AVC) curve, what is the firm's optimal short-run decision?

Accepted Answer

Shut down and produce zero output.

Question 7

Which equation correctly expresses a firm's profit in terms of price, average total cost, and quantity?

Accepted Answer

$$	ext{Profit} = (P - ATC) 	imes Q$$

Question 8

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

Accepted Answer

New firms will enter, increasing supply and lowering price.

Question 9

Which of the following best describes productive efficiency in a perfectly competitive market?

Accepted Answer

Firms produce at the lowest possible cost.

Question 10

Allocative efficiency occurs in a perfectly competitive market when:

Accepted Answer

The last unit provides a marginal benefit to consumers equal to the marginal cost of production.

Question 11

Which of the following is a sunk cost for a firm deciding whether to shut down in the short run?

Accepted Answer

Fixed costs already paid or owed

Question 12

If $$P = ATC at $$the profit-maximizing output, what is the firm's economic profit?

Accepted Answer

Zero

Question 13

In the long run, the supply curve for a constant-cost perfectly competitive industry is:

Accepted Answer

Horizontal at the minimum point of the average cost curve

Question 14

Which of the following real-world examples best illustrates the entry and exit process in a perfectly competitive market?

Accepted Answer

The rise and fall of profits in the cage-free egg market as more farmers adopt the method

Question 15

Suppose a sneaker reseller earns positive economic profit. What is the likely long-run outcome in a perfectly competitive market?

Accepted Answer

Other resellers will enter, driving profits down to zero.

Question 16

Which of the following is true about the marginal cost curve for a perfectly competitive firm?

Accepted Answer

It is the firm's supply curve for prices at or above average variable cost.

Question 17

A firm in a perfectly competitive market is currently producing where $$MR \u003e MC. $$What should the firm do to maximize profit?

Accepted Answer

Increase output

Question 18

Which of the following best explains why economic profit in a perfectly competitive market is zero in the long run?

Accepted Answer

Entry and exit of firms drive price to the break-even level.

Question 19

In an increasing-cost industry, the long-run supply curve is:

Accepted Answer

Upward sloping

Question 20

Which of the following is a correct statement about the invisible hand in perfectly competitive markets?

Accepted Answer

It describes how individual actions lead to market equilibrium without central coordination.

Firms in Perfectly Competitive Markets: Microeconomics Chapter 12 Study Notes

Study Guide - Practice Questions