Question 1

In a perfectly competitive market, a firm faces a market price of $$10. Its average total cost (ATC) at the profit-maximizing output is 8$$, and it sells 100 units. What is the firm's economic profit?

Accepted Answer

$$\200$

Question 2

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

Accepted Answer

Perfectly elastic (horizontal)

Question 3

A firm in a perfectly competitive market finds that its marginal cost (MC) is $$12, while the market price is 10. $$What should the firm do to maximize profit?

Accepted Answer

Decrease output

Question 4

If the market price falls below a firm's average variable cost (AVC) in the short run, what is the firm's optimal decision?

Accepted Answer

Shut down production

Question 5

In the long run, what is the equilibrium condition for a perfectly competitive firm?

Accepted Answer

$$P = ATC = MC$$

Question 6

Which of the following is NOT a characteristic of monopolistic competition?

Accepted Answer

Firms are price takers

Question 7

In monopolistic competition, why does the marginal revenue (MR) curve lie below the demand curve?

Accepted Answer

Because firms must lower the price to sell additional units

Question 8

A monopolistically competitive firm is earning economic profits in the short run. What will happen in the long run?

Accepted Answer

New firms will enter, driving economic profit to zero

Question 9

Which of the following best explains why monopolistic competition is not productively efficient in the long run?

Accepted Answer

Firms do not produce at minimum average total cost (ATC)

Question 10

Which of the following is an example of a barrier to entry in an oligopoly?

Accepted Answer

Patents

Question 11

In the context of game theory, what is a Nash equilibrium?

Accepted Answer

A situation where each firm chooses the best strategy given the other firm's strategy

Question 12

Suppose two firms in an oligopoly are deciding whether to advertise. If both advertise, each earns $$\2$ million. If neither advertises, each earns $$\$$3$$ million. If one advertises and the other does not, the advertiser earns $$\4$ million and the other earns $$\$$1$$ million. What is the Nash equilibrium?

Accepted Answer

Both firms advertise

Question 13

Which of the following best describes allocative efficiency in perfect competition?

Accepted Answer

$$P = MC$$

Question 14

A perfectly competitive firm is producing where $$P = MC = ATC. $$What is the firm's economic profit?

Accepted Answer

Zero

Question 15

Which of the following is NOT one of the Five Competitive Forces in the Five Forces Model?

Accepted Answer

Government regulation

Question 16

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

Accepted Answer

Continue producing to cover variable costs

Question 17

Which of the following strategies is most likely to help a firm succeed in monopolistic competition?

Accepted Answer

Building brand loyalty through advertising and product differentiation

Question 18

In a sequential game, what must a firm consider when making its decision?

Accepted Answer

The likely reactions of competitors to its actions

Question 19

Suppose a perfectly competitive firm faces the following costs at its profit-maximizing output: $$P = \15$, $$ATC = \$$18$$, $$AVC = \12$. What should the firm do in the short run?

Accepted Answer

Continue producing, even though it is incurring a loss

Question 20

Which of the following best explains why supplier power is low when many suppliers exist in an industry?

Accepted Answer

Buyers can easily switch between suppliers

Market Structures: Perfect Competition, Monopolistic Competition, and Oligopoly – Study Guide

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