Question 1

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

Accepted Answer

Each buyer or seller can influence the market price.

Question 2

A firm in a perfectly competitive market is considered a price taker. What does this mean?

Accepted Answer

The firm must accept the market price and can only choose the quantity to produce.

Question 3

Suppose a hotel owner faces an average total cost (ATC) of $$75 per room per night during the off-season. She is offered 70 $$for a room. Should she accept the offer?

Accepted Answer

Yes, if $70 is greater than the average variable cost (AVC), she should accept to cover variable costs.

Question 4

Which formula correctly calculates marginal cost (MC)?

Accepted Answer

$$ MC = \frac{\Delta TC}{\Delta Q} $$

Question 5

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

Accepted Answer

Shut down production temporarily.

Question 6

Producer surplus is best described as:

Accepted Answer

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

Question 7

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

Accepted Answer

$$ MR = MC $$

Question 8

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

Accepted Answer

Foregone income from choosing to run your own business instead of working elsewhere.

Question 9

If a government introduces a subsidy for ethanol producers, what is the most likely short-run effect on the number of ethanol plants?

Accepted Answer

The number of plants will increase.

Question 10

Which equation represents average total cost (ATC)?

Accepted Answer

$$ ATC = \frac{TC}{Q} $$

Question 11

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

Accepted Answer

New firms will enter, increasing supply and driving profits to zero.

Question 12

Which of the following best describes economies of scale?

Accepted Answer

Average total cost decreases as output increases.

Question 13

If a firm doubles all its inputs and output also doubles, what is this called?

Accepted Answer

Constant returns to scale

Question 14

Suppose the price elasticity of supply is high for a product. What does this imply?

Accepted Answer

A small change in price leads to a large change in quantity supplied.

Question 15

Which of the following is true about sunk costs?

Accepted Answer

They should not affect current or future production decisions.

Question 16

A corn farmer can earn $$50,000 profit growing corn or 40$$,000 profit growing soybeans. What is the economic profit from growing corn?

Accepted Answer

$$ 10$$,000 $

Question 17

If the market price is $1.13 and a firm sells 225 units, what is the total revenue?

Accepted Answer

Question 18

Which rule determines whether a firm should shut down in the short run?

Accepted Answer

Shut down if $$ P \u003c AVC $$

Question 19

If a government subsidy for ethanol is reduced, what is the likely effect on the number of sellers in the market at the original price?

Accepted Answer

More sellers will leave the market.

Question 20

Which of the following best describes the short-run supply curve for a perfectly competitive firm?

Accepted Answer

It is the portion of the marginal cost curve above the average variable cost.

Chapter 6: Sellers and Incentives in Perfectly Competitive Markets

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