Question 1

In a perfectly competitive market, which of the following statements is TRUE about the demand curve faced by an individual firm?

Accepted Answer

It is perfectly elastic at the market price, meaning the firm can sell any quantity at that price.

Question 2

Suppose a perfectly competitive firm produces 100 units of output. The market price is $$10, and the firm's total cost is 900. $$What is the firm's profit?

Accepted Answer

$$\100$

Question 3

A perfectly competitive firm will maximize profit by producing the quantity where:

Accepted Answer

$$P = MR = MC$$

Question 4

If the market price is $$8, the average total cost (ATC) at the profit-maximizing output is 10$$, and the average variable cost (AVC) is $6, what should a perfectly competitive firm do in the short run?

Accepted Answer

Continue producing because $$P \u003e AVC$$ and losses are less than fixed costs.

Question 5

In the long run, what happens to economic profit in a perfectly competitive market?

Accepted Answer

Firms earn zero economic profit because entry and exit drive price to minimum ATC.

Question 6

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

Accepted Answer

$$P = MC$$, so resources are allocated according to consumer preferences.

Question 7

A monopolistically competitive firm faces which type of demand curve, and why?

Accepted Answer

A downward-sloping demand curve because its product is differentiated from competitors.

Question 8

In the long run, why do monopolistically competitive firms earn zero economic profit?

Accepted Answer

Entry of new firms shifts each firm's demand curve leftward until it is tangent to ATC.

Question 9

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

Accepted Answer

High barriers to entry.

Question 10

Suppose a monopolistically competitive firm finds that at its profit-maximizing output, $$P = \15$, $$ATC = \$$12$$, and it sells 100 units. What is its profit?

Accepted Answer

$$\300$

Question 11

Which of the following best explains why monopolistic competition does NOT achieve productive efficiency?

Accepted Answer

Firms do not produce at minimum ATC and have excess capacity.

Question 12

Which of the following is a barrier to entry that can lead to an oligopoly?

Accepted Answer

Control of a key input.

Question 13

In a duopoly, both firms can choose to either advertise or not advertise. If both firms have a dominant strategy to advertise, what is the likely outcome?

Accepted Answer

Both firms will advertise, even if they would be better off cooperating and not advertising.

Question 14

Which of the following is TRUE about Nash equilibrium in the context of oligopoly?

Accepted Answer

Each firm chooses its best strategy given the strategy chosen by its rival.

Question 15

A cartel is most likely to succeed in raising profits when:

Accepted Answer

Firms can effectively collude and enforce output restrictions.

Question 16

In a sequential game, what is the purpose of backward induction?

Accepted Answer

To determine the optimal strategy by reasoning from the final decision back to the initial choice.

Question 17

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

Accepted Answer

The threat of government regulation.

Question 18

Why does advertising play a different role in monopolistic competition compared to perfect competition?

Accepted Answer

Advertising can make demand more inelastic in monopolistic competition, but has no effect in perfect competition.

Question 19

Suppose a perfectly competitive firm faces a market price of $$\20$, and its marginal cost at 50 units is $$\$$20. If $$the average variable cost at 50 units is $$\18$, and the average total cost is $$\$$22$$, what should the firm do in the short run?

Accepted Answer

Continue producing because $$P \u003e AVC$$, even though it is making a loss.

Question 20

Which of the following best explains why perfect competition leads to productive efficiency in the long run?

Accepted Answer

Firms produce at the minimum point of the average total cost curve.

Study Notes: Perfect Competition, Monopolistic Competition, and Oligopoly

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