Question 1

In the long-run equilibrium of a perfectly competitive market, which of the following is true regarding firm profits?

Accepted Answer

Firms earn zero economic profit because $$P = ATC$$

Question 2

Which condition must be met for a firm to maximize profit in both the short run and long run?

Accepted Answer

$$P = MC$$

Question 3

A firm in a perfectly competitive market faces a price below its average variable cost ($$P \u003c AVC) in $$the short run. What should the firm do?

Accepted Answer

Shut down temporarily

Question 4

In the short run, which cost is relevant for a firm's shutdown decision?

Accepted Answer

Average variable cost ($$AVC)$$

Question 5

If $$P \u003e ATC in $$the long run, what will happen in a perfectly competitive market?

Accepted Answer

New firms will enter the market

Question 6

Why does $$ATC$$ not matter for short-run shutdown decisions?

Accepted Answer

Because fixed costs are sunk in the short run

Question 7

A firm is producing where $$P = MC$$ and $$P  AVC. $$What is the firm's profit situation?

Accepted Answer

The firm is earning negative economic profit but should continue producing in the short run

Question 8

Which rule determines whether a firm should enter the market in the long run?

Accepted Answer

Enter if $$P \u003e ATC$$

Question 9

In the long run, why does $$AVC$$ not matter for entry and exit decisions?

Accepted Answer

Because all costs are variable in the long run

Question 10

Suppose a firm in a perfectly competitive market is currently producing at $$P = MC = ATC. $$What does this imply about the firm's profit?

Accepted Answer

The firm is earning zero economic profit

Question 11

If a firm can cover its variable costs but not its total costs in the short run, what is the best decision?

Accepted Answer

Continue producing to minimize losses

Question 12

Which of the following is always true for profit maximization in both the short run and long run?

Accepted Answer

$$P = MC$$

Question 13

A firm in the short run faces $$P \u003c AVC. $$What is the economic rationale for shutting down?

Accepted Answer

The firm cannot cover its variable costs

Question 14

In the long run, what happens if $$P \u003c ATC$$ for a firm in a perfectly competitive market?

Accepted Answer

The firm will exit the market

Question 15

Which cost curve disappears in the long run due to the fixed/variable distinction vanishing?

Accepted Answer

Average variable cost ($$AVC)$$

Question 16

A firm is deciding whether to produce or shut down in the short run. If $$P = AVC$$, what should the firm do?

Accepted Answer

Produce, since it can cover variable costs

Question 17

Which of the following statements is correct regarding entry and exit in the short run?

Accepted Answer

Firms can only stay open or shut down temporarily in the short run

Question 18

If a firm is producing at $$P \u003e ATC in $$the long run, what is the likely market outcome?

Accepted Answer

Other firms will enter the market, driving profits to zero

Question 19

In a real-world scenario, a restaurant faces a sudden drop in customers, causing $$P to $$fall below $$AVC. $$What should the restaurant do in the short run?

Accepted Answer

Shut down temporarily until conditions improve

Question 20

Which of the following best describes the difference between short-run and long-run decisions for firms in perfect competition?

Accepted Answer

Short run decisions are based on $$AVC$$, long run decisions are based on $$ATC$$

Short Run vs Long Run Entry/Exit Rules in Perfect Competition

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