Question 1

In a perfectly competitive market, which condition must be true for a firm to maximize profit?

Accepted Answer

Produce where $$MR = MC$$

Question 2

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

Accepted Answer

Horizontal at the market price

Question 3

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

Accepted Answer

Shut down production temporarily

Question 4

Which equation represents the firm's supply curve in a perfectly competitive market?

Accepted Answer

$$MC$$ above $$AVC$$

Question 5

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

Accepted Answer

Firms earn zero economic profit

Question 6

Allocative efficiency in a perfectly competitive market occurs when:

Accepted Answer

$$P = MC$$

Question 7

Productive efficiency in the long run is achieved when:

Accepted Answer

Firms produce at the minimum of the average total cost curve

Question 8

Suppose a perfectly competitive firm faces the following cost curves: $$MC$$, $$ATC$$, and $$AVC. If $$the market price is above $$AVC$$ but below $$ATC$$, what will the firm do in the short run?

Accepted Answer

Produce at a loss

Question 9

Which of the following is a barrier to entry in a market?

Accepted Answer

High startup costs

Question 10

In a perfectly competitive market, what happens to the market supply curve in an increasing cost industry as output expands?

Accepted Answer

It slopes upward

Question 11

If a perfectly competitive firm is producing where $$P = MC = ATC$$, what is the firm's economic profit?

Accepted Answer

Zero

Question 12

Which of the following best explains why perfectly competitive firms are not productively efficient in the short run?

Accepted Answer

Firms do not produce at the minimum of the $$ATC$$ curve

Question 13

A perfectly competitive firm’s marginal revenue ($$MR) is $$equal to:

Accepted Answer

The market price ($$P)$$

Question 14

If the market price is $$P_1$$ and a firm’s $$MC$$ curve crosses $$AVC at$$ $$Q_1$$, what does $$Q_1$$ represent?

Accepted Answer

The shutdown point

Question 15

Which of the following statements is true about the long-run supply curve in a perfectly competitive market with constant costs?

Accepted Answer

It is horizontal

Question 16

A decrease in demand in a perfectly competitive market will initially cause:

Accepted Answer

A decrease in market price and firm profits

Question 17

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

Accepted Answer

Barriers to entry

Question 18

Suppose a perfectly competitive firm’s $$MC$$ curve shifts upward due to an increase in input costs. What is the likely effect on the firm’s supply?

Accepted Answer

The firm will supply less at each price

Question 19

In a perfectly competitive market, what happens if firms are earning economic losses in the short run?

Accepted Answer

Some firms will exit the market in the long run

Question 20

Which of the following best describes the relationship between total revenue and total cost at the profit-maximizing output in perfect competition?

Accepted Answer

Total revenue exceeds total cost by the greatest amount

Study Guide: Perfectly Competitive Markets in Macroeconomics

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