Q: If a firm’s price is $$1.13, its ATC is 0.93$$, and it sells 1,225 units, what is its profit?

$$Profit = (P - ATC) \times Q = (1.13 - 0.93) \times 1,225 = 245$$

Question 1

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

Accepted Answer

Each seller can influence the market price.

Question 2

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

Accepted Answer

$$MR = MC$$

Question 3

If the market price falls below a firm’s average variable cost (AVC) in the short run, what should the firm do?

Accepted Answer

Shut down production.

Question 4

Which of the following best describes the law of diminishing returns?

Accepted Answer

Adding more of a variable input eventually decreases the marginal product of that input.

Question 5

A firm’s total cost in the short run is given by:

Accepted Answer

$$TC = VC + FC$$

Question 6

Suppose a bakery’s fixed costs are $$200 per day and its variable costs are 600 $$per day when producing 400 loaves of bread. What is the average total cost (ATC) per loaf?

Accepted Answer

$$ATC = \frac{TC}{Q} = \frac{200 + 600}{400} = 2$$

Question 7

Producer surplus is best described as:

Accepted Answer

The area below the market price and above the supply (MC) curve.

Question 8

If a firm’s price is $$1.13, its ATC is 0.93$$, and it sells 1,225 units, what is its profit?

Accepted Answer

$$Profit = (P - ATC) 	imes Q = (1.13 - 0.93) 	imes 1,225 = 245$$

Question 9

Which of the following is an example of an implicit (opportunity) cost?

Accepted Answer

The salary the owner could earn working elsewhere.

Question 10

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

Accepted Answer

New firms will enter, driving profits down to zero.

Question 11

Which of the following best describes economies of scale?

Accepted Answer

Average total cost falls as output increases.

Question 12

If the price elasticity of supply $$e_s \u003e 1$$, supply is:

Accepted Answer

Elastic

Question 13

A firm’s short-run supply curve is:

Accepted Answer

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

Question 14

Which of the following is true about sunk costs?

Accepted Answer

They should not affect current or future production decisions.

Question 15

Suppose the government introduces a subsidy for ethanol producers. In the short run, what is the most likely effect?

Accepted Answer

Short-run profits for ethanol producers increase.

Question 16

If a firm’s marginal cost of producing the 10th unit is $$0.80 and the market price is 1.00$$, what should the firm do?

Accepted Answer

Produce the 10th unit because $$P \u003e MC.$$

Question 17

Which of the following is true in long-run competitive equilibrium?

Accepted Answer

Firms earn zero economic profit.

Question 18

If the market price is $$1.00, average variable cost is 1.10$$, and average total cost is $1.25, what should a perfectly competitive firm do in the short run?

Accepted Answer

Shut down because $$P \u003c AVC$$

Question 19

Which of the following would increase the price elasticity of supply for a firm?

Accepted Answer

Having more inventory available.

Sellers and Incentives in Perfect Competition: Microeconomics Study Guide

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