Question 1

For a perfectly competitive firm, which of the following statements is TRUE regarding the relationship between price, marginal revenue, and average revenue?

Accepted Answer

Price equals marginal revenue equals average revenue: $$P = MR = AR.$$

Question 2

A wheat farmer in a perfectly competitive market faces a demand curve that is:

Accepted Answer

Perfectly elastic.

Question 3

A competitive firm maximizes profit by producing the quantity where:

Accepted Answer

$$MR = MC$$

Question 4

Suppose a competitive firm faces a market price below its average variable cost at all output levels. What should the firm do in the short run?

Accepted Answer

Shut down immediately.

Question 5

Which area on a cost curve graph represents the producer's surplus (rent) for a competitive firm?

Accepted Answer

The area between the price line and the marginal cost curve, above the average variable cost.

Question 6

If a competitive firm is producing at a level where $$P = AVC$$ but $$P \u003c AC$$, what is the firm's profit?

Accepted Answer

The firm is making a loss but covering its variable costs.

Question 7

Jake is considering opening a food stall. His expected total revenue is $$130,000. His explicit costs are: rent 10$$,000, wages $$20,000, utilities 5$$,000, interest $$5,000, raw materials 40$$,000. If he must quit a job paying $40,000, what is his expected economic profit?

Accepted Answer

$$130,000 - (10,000 + 20,000 + 5,000 + 5,000 + 40,000 + 40,000) = 10$$,000$

Question 8

In the long-run equilibrium of a perfectly competitive market with identical firms and no sunk costs, which of the following is TRUE?

Accepted Answer

$$P = MC = minAC$$ and economic profit is zero.

Question 9

Which of the following best describes the shutdown point for a competitive firm?

Accepted Answer

The output level where $$P = AVC.$$

Question 10

If the market price is above a competitive firm's average total cost at its profit-maximizing output, what will happen in the long run?

Accepted Answer

New firms will enter, driving the price down to $$minAC.$$

Question 11

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

Accepted Answer

The firm can influence the market price.

Question 12

Suppose the market supply curve is upward-sloping. What does this imply about the individual firm supply curves?

Accepted Answer

Individual firm supply curves are also upward-sloping above the shutdown point.

Question 13

If a firm is earning zero economic profit in equilibrium, what does this mean?

Accepted Answer

The firm is covering all explicit and implicit costs, including opportunity costs.

Question 14

Which of the following best describes the difference between profit and rent for a competitive firm?

Accepted Answer

Profit includes both fixed and variable costs, while rent is the surplus over variable costs.

Question 15

In a market with identical firms but different fixed costs, what happens as the market price rises?

Accepted Answer

Firms with higher AVC start producing, increasing market supply.

Question 16

Which of the following is the correct formula for marginal revenue?

Accepted Answer

$$MR = \frac{\Delta TR}{\Delta Q}$$

Question 17

A competitive firm will continue to produce in the short run as long as:

Accepted Answer

$$P \geq AVC$$

Question 18

If a firm’s total revenue is less than its total variable cost, what should the firm do?

Accepted Answer

Shut down immediately.

Question 19

Which of the following is TRUE about the market supply curve in a perfectly competitive market?

Accepted Answer

It is the horizontal sum of all individual firms’ supply curves.

Question 20

In equilibrium, what does the marginal firm earn?

Accepted Answer

Zero profit and zero rent.

The Competitive Firm and Market Supply Curves: Microeconomics Study Notes

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