Q: Which of the following equations correctly expresses a perfectly competitive firm's profit?

$$\text{Profits} = (p - ATC) \times Q$$

Question 1

Which of the following is NOT an assumption of a perfectly competitive market?

Accepted Answer

Each firm can influence the market price through its own output decisions.

Question 2

In a perfectly competitive market, the demand curve faced by an individual firm is:

Accepted Answer

Horizontal at the market price, because the firm is a price taker.

Question 3

Suppose a wheat farmer in a perfectly competitive market increases output by 200%, but the market price falls by only 0.0016%. What does this imply about the price elasticity of demand for the individual farmer?

Accepted Answer

It is extremely high, indicating nearly perfectly elastic demand.

Question 4

A hotel operates in the off-season at a price that does not cover total costs but does cover variable costs. According to microeconomic theory, what should the hotel do in the short run?

Accepted Answer

Continue operating as long as price exceeds average variable cost.

Question 5

For a perfectly competitive firm, which of the following relationships always holds?

Accepted Answer

$$AR = MR = p$$

Question 6

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

Accepted Answer

$$p = MC$$

Question 7

If the market price falls below a firm's average variable cost, what is the firm's best short-run decision?

Accepted Answer

Shut down production immediately.

Question 8

Which of the following equations correctly expresses a perfectly competitive firm's profit?

Accepted Answer

$$	ext{Profits} = (p - ATC) 	imes Q$$

Question 9

In the long-run equilibrium of a perfectly competitive industry, which of the following is true for all firms?

Accepted Answer

Firms produce at the minimum point of their LRAC curves.

Question 10

Suppose technological progress reduces the costs for newly built plants in a competitive industry. What is the likely long-run effect on the market?

Accepted Answer

Market price will fall and industry output will rise.

Question 11

Which of the following facts is inconsistent with an industry being perfectly competitive?

Accepted Answer

Individual firms devote a large fraction of their sales receipts to advertising their own product brands.

Question 12

A perfectly competitive firm's short-run supply curve is:

Accepted Answer

Its marginal cost curve above the minimum of average variable cost.

Question 13

If a perfectly competitive firm is producing at a price where $$p  AVC$$, what should the firm do in the short run?

Accepted Answer

Continue producing to minimize losses.

Question 14

Which of the following best explains why a perfectly competitive firm cannot increase its price above the market price?

Accepted Answer

Buyers will purchase from other firms offering the same product at the market price.

Question 15

In the short run, if a competitive firm produces nothing, what costs must it still pay?

Accepted Answer

Total fixed costs only.

Question 16

Which of the following is the correct formula for marginal revenue for a perfectly competitive firm?

Accepted Answer

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

Question 17

If existing firms in a competitive industry are earning positive economic profits, what will happen in the long run?

Accepted Answer

New firms will enter, increasing supply and lowering price.

Question 18

A competitive industry in long-run equilibrium experiences a continual decrease in demand. What is the most efficient response for firms?

Accepted Answer

Continue operating as long as price covers variable costs, gradually reducing capacity.

Question 19

Which of the following statements about long-run equilibrium in a perfectly competitive market is TRUE?

Accepted Answer

Firms are producing at a point where $$p = MC = LRAC.$$

Question 20

Suppose a new technology lowers the average cost for new firms in a competitive industry, but old firms' costs remain unchanged. In the long run, what will happen to the old firms?

Accepted Answer

They will eventually exit the industry as they cannot cover long-run costs.

Chapter 9 - Competitive Markets: Theory and Applications (Chapter 9 Study Notes)

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