Question 1

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

Accepted Answer

Firms can influence the market price by adjusting their output.

Question 2

Suppose a firm in a perfectly competitive market faces a market price $$p = 10. $$Its cost function is $$C(q) = 20 + 2q + q^2$. What is the profit-maximizing output level q$$^*$$ in the short run?

Accepted Answer

$$q^* = 8$$

Question 3

In the short run, a firm will continue to produce even if it is making a loss as long as:

Accepted Answer

$$p \geq AVC(q^*)$$

Question 4

If a firm’s marginal cost curve is $$MC(q) = 2 + 2q$$ and the market price is $$p = 10$$, what is the profit-maximizing output level?

Accepted Answer

$$q^* = 4$$

Question 5

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

Accepted Answer

Perfectly elastic at the market price.

Question 6

A firm’s profit function is $$\Pi(q) = pq - C(q). If$$ $$p = MC(q^*)$$ and $$p \geq AVC(q^*)$$, what does this imply?

Accepted Answer

The firm is maximizing profit and should produce $$q^*.$$

Question 7

In the long run, if a firm is making losses, what will happen according to the theory of competitive markets?

Accepted Answer

The firm will exit the market.

Question 8

Given the cost function $$C(q) = 50 + 5q$$, what is the average variable cost (AVC) at $$q = 10$$?

Accepted Answer

$$AVC = 5$$

Question 9

Why is the condition $$p = MC(q^*)$$ necessary for profit maximization in a perfectly competitive market?

Accepted Answer

Because if $$p \u003e MC(q^*)$$, the firm can increase profit by producing more.

Question 10

A firm’s total cost is $$C(q) = 100 + 4q + q^2$. If the market price is p = 14$, what is the firm’s profit at the profit-maximizing output?

Accepted Answer

$$\Pi = 64$$

Question 11

Which of the following statements is TRUE regarding the short-run supply curve of a competitive firm?

Accepted Answer

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

Question 12

If a firm’s average total cost at $$q^* is$$ $$8$$ and the market price is $$10$$, what is the profit per unit?

Accepted Answer

$$2$$

Question 13

Suppose the market price falls below the minimum average variable cost for all firms in a perfectly competitive industry. What will happen in the short run?

Accepted Answer

All firms will shut down production.

Question 14

Which of the following best explains why a firm might produce a positive output but still incur losses in the short run?

Accepted Answer

Because the firm can cover its variable costs but not its fixed costs.

Question 15

A firm’s cost function is $$C(q) = 40 + 2q^2$. If the market price is p = 16$, what is the profit-maximizing output?

Accepted Answer

$$q^* = 4$$

Question 16

In the long run, the profit-maximizing condition for a competitive firm is:

Accepted Answer

$$p = MC(q^*)$$ and $$p \geq AC(q^*)$$

Question 17

If a firm’s total revenue is $$R(q) = pq$$ and its total cost is $$C(q) = 30 + 3q$$, what is the break-even price?

Accepted Answer

$$p = 3$$

Question 18

Which of the following is a necessary step in deriving the long-run cost curve?

Accepted Answer

Find the input combination $$(L, K)$$ that touches the lowest isocost line for a given output.

Question 19

A competitive firm’s profit is given by $$\Pi(q^*) = q^*(p - AC(q^*)). If$$ $$p \u003c AC(q^*)$$, what does this imply?

Accepted Answer

The firm is making a loss at $$q^*.$$

Question 20

If a firm’s fixed cost increases, what happens to its short-run supply curve?

Accepted Answer

It does not change.

Profit Maximization and Competitive Supply in Perfectly Competitive Markets

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