Question 1

In the long-run equilibrium of a perfectly competitive market, which of the following is true about firms' economic profit?

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 the long run in perfect competition?

Accepted Answer

$$P = MC$$

Question 3

A firm in a perfectly competitive market faces the following costs: $$ATC = 10$$, $$AVC = 7$$, and the market price $$P = 8. $$What should the firm do in the short run?

Accepted Answer

Produce, because $$P \u003e AVC$$

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 a firm in the short run cannot cover its variable costs, what should it do?

Accepted Answer

Shut down temporarily

Question 6

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

Accepted Answer

Enter if $$P \u003e ATC$$

Question 7

Why does $$AVC$$ not matter for long-run entry and exit decisions?

Accepted Answer

Because all costs are variable in the long run and $$ATC$$ includes all costs

Question 8

Suppose a firm is producing where $$P = MC$$ but $$P \u003c ATC. $$What does this imply in the long run?

Accepted Answer

The firm should exit the market

Question 9

A firm in the short run faces $$P = 6$$, $$AVC = 5$$, and $$ATC = 8. $$What is the firm's profit per unit?

Accepted Answer

$$6 - 8 = -2$$

Question 10

Which of the following statements is true about the short-run decision to produce?

Accepted Answer

Produce if $$P \u003e AVC$$

Question 11

In a perfectly competitive market, what happens if $$P \u003e ATC in $$the long run?

Accepted Answer

Firms will enter the market

Question 12

If $$P = MC = ATC in $$the long-run equilibrium, what does this imply about the firm's profit?

Accepted Answer

The firm earns zero economic profit

Question 13

A firm is considering shutting down in the short run. Which of the following is the correct shutdown rule?

Accepted Answer

Shut down if $$P \u003c AVC$$

Question 14

Which of the following is always true for profit maximization in perfect competition?

Accepted Answer

$$P = MC$$

Question 15

In the short run, why might a firm continue to produce even if it is making losses?

Accepted Answer

Because $$P \u003e AVC$$ and it can cover variable costs

Question 16

If a firm faces $$P = 12$$, $$AVC = 10$$, and $$ATC = 15$$, what should it do in the short run and long run?

Accepted Answer

Produce in the short run, exit in the long run

Question 17

Which cost distinction disappears in the long run, making $$AVC$$ irrelevant for entry/exit decisions?

Accepted Answer

Fixed/variable cost distinction

Question 18

A firm in a perfectly competitive market is producing at $$P = MC = ATC. $$What will happen if the market price rises above $$ATC$$?

Accepted Answer

Firms will earn positive economic profit and new firms will enter

Question 19

If a firm is producing where $$P \u003c AVC in $$the short run, what is the best decision?

Accepted Answer

Shut down temporarily

Question 20

Which of the following summarizes the entry/exit rules for the long run in perfect competition?

Accepted Answer

Enter if $$P \u003e ATC$$, exit if $$P \u003c ATC$$

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

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