Question 1

Suppose a perfectly competitive firm faces the cost curves shown in the graph, where $$MC is $$the marginal cost curve and $$ATC is $$the average total cost curve. If the market price is $$P_1$$, which is below the minimum of the $$ATC$$ curve but above the $$AVC$$ curve, what is the firm's short-run decision?

Accepted Answer

Continue producing at the output where $$MC = P_1$ to minimize losses

Question 2

If a firm decreases its production from $$Q_2 to$$ $$Q_1 as $$shown in the graph, what will happen to its profit?

Accepted Answer

Decrease its profit

Question 3

At which quantity does the firm maximize profit if the price is $$P_s ($$where $$P_s is $$the price at which $$MC = MR$$)?

Accepted Answer

$$Q_2$$

Question 4

If the price is $$P_1$$ and $$P_1$$ \u003c ATC$$ at the profit-maximizing output, what is the firm's economic condition?

Accepted Answer

Suffering an economic loss

Question 5

Which of the following best describes the shutdown point for a perfectly competitive firm?

Accepted Answer

The price at which $$P = AVC_{min}$$

Question 6

If a firm's marginal cost ($$MC) is $$below its marginal revenue ($$MR) at $$the current output, what should the firm do to maximize profit?

Accepted Answer

Increase output

Question 7

A firm is producing at the output where $$MC = MR = P$$ and $$P = ATC. $$What is the firm's economic profit?

Accepted Answer

Zero (breaking even)

Question 8

If the market price falls below the minimum average variable cost ($$AVC_{min}$$), what is the firm's best short-run response?

Accepted Answer

Shut down and produce zero output

Question 9

Suppose a firm is currently producing at $$Q_2$$ where $$MC \u003e MR. $$What should the firm do to maximize profit?

Accepted Answer

Decrease output

Question 10

If a perfectly competitive firm is earning an economic profit in the short run, what will likely happen in the long run?

Accepted Answer

New firms will enter the market, driving the price down to $$ATC$$

Question 11

Which of the following equations represents the profit-maximizing rule for a perfectly competitive firm?

Accepted Answer

$$MC = MR = P$$

Question 12

If a firm is breaking even, what does this imply about its total revenue ($$TR) $$and total cost ($$TC$$)?

Accepted Answer

$$TR = TC$$

Question 13

A firm faces the following cost and revenue functions: $$TC = 100 + 5Q + Q^2$, P = 25$. What is the profit-maximizing output?

Accepted Answer

$$Q = 10$$

Question 14

If a firm is producing at a quantity where $$P \u003e ATC$$, what is true about the firm's profit?

Accepted Answer

The firm is earning an economic profit

Question 15

Which of the following best describes the relationship between marginal cost ($$MC) $$and average total cost ($$ATC) $$when $$MC is $$below $$ATC$$?

Accepted Answer

$$ATC is $$decreasing

Profit Maximization and Cost Curves in Perfect Competition

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