Question 1

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

Accepted Answer

Firms can influence the market price.

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

Suppose a wheat farmer can sell any quantity of wheat at $7 per bushel. What is the marginal revenue (MR) from selling one more bushel?

Accepted Answer

$7

Question 4

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

Accepted Answer

$$MC = MR$$

Question 5

If a firm’s price is below its average variable cost ($$P \u003c AVC$$), what should the firm do in the short run?

Accepted Answer

Shut down and produce zero output.

Question 6

Which of the following best describes economic profit?

Accepted Answer

Total revenue minus both explicit and implicit costs.

Question 7

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

Accepted Answer

New firms enter, increasing supply and lowering prices.

Question 8

Which equation correctly expresses the profit per unit for a perfectly competitive firm?

Accepted Answer

$$P - ATC$$

Question 9

A firm is producing at the point where $$P = ATC. $$What is the firm’s economic profit?

Accepted Answer

Zero

Question 10

If the market price falls below the minimum point of the average variable cost curve, what is the firm’s short-run supply?

Accepted Answer

Zero

Question 11

Which of the following is an example of a sunk cost for a firm?

Accepted Answer

Money spent on non-refundable equipment

Question 12

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

Accepted Answer

Horizontal at the minimum average cost

Question 13

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

Accepted Answer

Every good is produced up to the point where $$P = MC.$$

Question 14

Suppose the price of cage-free eggs rises, leading to economic profits for farmers. What will happen in the long run?

Accepted Answer

New firms will enter, increasing supply and reducing profits.

Question 15

If a firm in a perfectly competitive market is making a loss but $$P \u003e AVC$$, what should the firm do in the short run?

Accepted Answer

Continue producing to minimize losses.

Question 16

Which of the following is true at the long-run equilibrium in a perfectly competitive market?

Accepted Answer

$$P = MC = ATC$$

Question 17

A decreasing-cost industry will have which type of long-run supply curve?

Accepted Answer

Downward sloping

Question 18

Which of the following is an example of productive efficiency?

Accepted Answer

A firm produces at the minimum point of its average total cost curve.

Question 19

If a firm’s marginal cost is less than the market price, what should the firm do to maximize profit?

Accepted Answer

Increase output.

Question 20

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

Accepted Answer

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

Firms in Perfectly Competitive Markets: Microeconomics Study Guide

Study Guide - Practice Questions