Q: Which formula correctly expresses a perfectly competitive firm’s profit?

Both $$Profit = (P \times Q) - TC$$ and $$Profit = (P - ATC) \times Q$$

Question 1

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

Accepted Answer

Firms are price makers.

Question 2

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

Accepted Answer

Horizontal at the market price.

Question 3

In a perfectly competitive market, the marginal revenue (MR) for a firm is:

Accepted Answer

$$MR = P$$, and is constant for all output levels.

Question 4

Suppose a perfectly competitive firm faces a market price of $$10. Its total cost of producing 5 units is 60$$, and its total cost of producing 6 units is $72. Should the firm produce the 6th unit? Why or why not?

Accepted Answer

No, because marginal cost ($$12) is greater than price (10).$$

Question 5

The profit-maximizing rule for a perfectly competitive firm is:

Accepted Answer

$$MR = MC$$

Question 6

If a perfectly competitive firm is producing at a point where $$P \u003c AVC$$, what should the firm do in the short run?

Accepted Answer

Shut down and produce zero output.

Question 7

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

Accepted Answer

Its marginal cost curve above the average variable cost curve.

Question 8

In the long run, if firms in a perfectly competitive industry are earning economic profits, what will happen?

Accepted Answer

New firms will enter, increasing supply and lowering price until profits are zero.

Question 9

Which formula correctly expresses a perfectly competitive firm’s profit?

Accepted Answer

Both $$Profit = (P 	imes Q) - TC$$ and $$Profit = (P - ATC) 	imes Q$$

Question 10

A perfectly competitive firm is producing 100 units at a price of $$5. Its average total cost is 4. $$What is its total profit?

Accepted Answer

$$100$$

Question 11

Which of the following best describes allocative efficiency in a perfectly competitive market?

Accepted Answer

The last unit produced provides a marginal benefit to consumers equal to the marginal cost of production.

Question 12

In a constant cost industry, the long-run supply curve is:

Accepted Answer

Horizontal.

Question 13

If the market price falls below a firm’s average variable cost, what costs does the firm still have to pay if it shuts down in the short run?

Accepted Answer

All fixed costs (sunk costs).

Question 14

Suppose a perfectly competitive firm’s total revenue is $$500 and its total cost is 600. $$What is the firm’s profit, and what should it consider doing in the long run?

Accepted Answer

Profit is $-100; the firm should consider exiting the market in the long run.

Question 15

Which of the following is true at the long-run equilibrium in a perfectly competitive market?

Accepted Answer

$$P = MC = ATC$$

Question 16

A perfectly competitive firm’s marginal cost curve intersects its average total cost curve at:

Accepted Answer

The minimum point of the average total cost curve.

Question 17

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

Accepted Answer

Zero.

Question 18

Which of the following real-world markets is most likely to approximate perfect competition?

Accepted Answer

The market for wheat.

Question 19

If a perfectly competitive firm’s marginal cost is below the market price, what should the firm do to maximize profit?

Accepted Answer

Increase output.

Question 20

In a perfectly competitive market, what happens to the market price in the long run if demand increases in an increasing cost industry?

Accepted Answer

The price rises permanently due to higher input costs.

Perfect Competition: Microeconomics Study Notes

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