Q: Which equation correctly represents profit for a firm?

$$\text{Profit} = \text{Total Revenue} - \text{Total Cost}$$

Q: Which formula represents the area of profit on a cost curve graph?

$$\text{Profit} = (P - ATC) \times Q$$

Question 1

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

Accepted Answer

Firms can easily influence the market price.

Question 2

In a perfectly competitive market, what is the relationship between price ($$P$$), average revenue ($$AR$$), and marginal revenue ($$MR$$)?

Accepted Answer

$$P = AR = MR$$

Question 3

A wheat farmer in a perfectly competitive market receives $7 per bushel. If the farmer sells 6,000 or 15,000 bushels, what happens to the price per bushel?

Accepted Answer

The price per bushel remains constant.

Question 4

Which equation correctly represents profit for a firm?

Accepted Answer

$$	ext{Profit} = 	ext{Total Revenue} - 	ext{Total Cost}$$

Question 5

A firm maximizes profit by producing the quantity where:

Accepted Answer

$$MR = MC$$

Question 6

If a perfectly competitive firm finds that $$P \u003c ATC at $$the profit-maximizing output, what is the firm’s situation?

Accepted Answer

The firm is making a loss.

Question 7

Suppose Farmer Smith’s marginal cost curve intersects the market price of $36 at 70,000 boxes of apples. What is the profit-maximizing output?

Accepted Answer

70,000 boxes

Question 8

If a firm in a perfectly competitive market is making a loss, what should it do in the short run if $$P \geq AVC$$?

Accepted Answer

Continue producing at the quantity where $$MC = MR$$

Question 9

Which formula represents the area of profit on a cost curve graph?

Accepted Answer

$$	ext{Profit} = (P - ATC) 	imes Q$$

Question 10

In the short run, a firm should shut down if:

Accepted Answer

$$P \u003c AVC$$

Question 11

A firm’s supply curve in the short run is given by:

Accepted Answer

The portion of the marginal cost curve above average variable cost

Question 12

If a firm is breaking even, what is the relationship between price and average total cost?

Accepted Answer

$$P = ATC$$

Question 13

Which of the following industries is most likely to be perfectly competitive?

Accepted Answer

Growing wheat

Question 14

A firm in a perfectly competitive market faces a horizontal demand curve because:

Accepted Answer

It is a price taker and cannot influence the market price.

Question 15

If a firm’s marginal cost is less than the market price, what should the firm do?

Accepted Answer

Increase output until $$MC = P$$

Question 16

Which rule is unique to perfectly competitive firms for profit maximization?

Accepted Answer

Produce where $$P = MC$$

Question 17

If a firm’s total revenue is less than its variable cost, what is the best short-run decision?

Accepted Answer

Shut down and produce zero output

Question 18

A student argues that a firm should produce at the quantity where the distance between price and marginal cost is greatest. Is this correct?

Accepted Answer

Incorrect. Profits are maximized at the quantity where marginal revenue equals marginal cost.

Question 19

If a firm in a perfectly competitive market is making a loss but $$P \u003e AVC$$, what is the rationale for continuing production?

Accepted Answer

The firm can cover its variable costs and reduce its losses compared to shutting down.

Question 20

Which of the following best describes the long-run outcome in a perfectly competitive market?

Accepted Answer

Firms enter and exit until all firms are breaking even ($$P = ATC).$$

Chap 12.1 - Profit Maximization and Loss Minimization in Perfectly Competitive Markets

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