Q: Which of the following best describes economic profit?

$$\text{Economic Profit} = TR - (\text{Explicit Costs} + \text{Implicit Costs})$$

Question 1

For a perfectly competitive firm, what is the price elasticity of demand for the firm's product?

Accepted Answer

Perfectly elastic

Question 2

A competitive firm maximizes profit by producing the quantity where:

Accepted Answer

$$P = MC$$

Question 3

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

Accepted Answer

Shut down production

Question 4

Which of the following best describes economic profit?

Accepted Answer

$$	ext{Economic Profit} = TR - (	ext{Explicit Costs} + 	ext{Implicit Costs})$$

Question 5

Suppose Jake’s expected total revenue is $$130,000$$ and his explicit costs are $$80,000. If $$his implicit cost (foregone salary) is $$40,000$$, what is his economic profit?

Accepted Answer

$$10,000$$

Question 6

In the short run, a competitive firm will continue to produce as long as:

Accepted Answer

$$P \geq AVC$$

Question 7

At the breakeven point for a competitive firm, which of the following is true?

Accepted Answer

$$P = AC$$

Question 8

Which area on a cost curve graph represents the producer’s surplus (rent) for a competitive firm?

Accepted Answer

The area between the price line and the AVC curve, up to the quantity produced

Question 9

If a competitive firm is earning zero economic profit in equilibrium, what does this imply?

Accepted Answer

The firm is covering all explicit and implicit costs

Question 10

Which of the following statements about the market supply curve in a perfectly competitive market is correct?

Accepted Answer

It is the horizontal sum of all individual firms’ supply curves

Question 11

If the market price is above the minimum average total cost but below the average total cost at the profit-maximizing output, what is the firm’s profit situation?

Accepted Answer

The firm is making a loss but should continue to produce in the short run

Question 12

Which of the following is true about the supply curve of a competitive firm?

Accepted Answer

It is the portion of the MC curve above the minimum AVC

Question 13

In the long-run equilibrium of a perfectly competitive market with identical firms, which of the following is true?

Accepted Answer

$$P = MC = minAC$$

Question 14

If a firm’s total revenue is $$100,000$$, total variable cost is $$60,000$$, and total fixed cost is $$30,000$$, what is the firm’s rent?

Accepted Answer

$$40,000$$

Question 15

Suppose the market price falls below the minimum AVC for all firms. What will happen in the short run?

Accepted Answer

All firms will shut down

Question 16

Which of the following best explains why a competitive firm cannot earn positive economic profit in the long run?

Accepted Answer

Entry of new firms drives the price down to the minimum average cost

Question 17

If a firm’s marginal cost is below the market price at its current output, what should the firm do to maximize profit?

Accepted Answer

Increase output

Question 18

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

Accepted Answer

The firm can influence the market price

Question 19

If the market price is equal to the minimum AVC, what is true about the firm’s rent?

Accepted Answer

Rent is zero

Question 20

In a market with identical firms but different fixed costs, what happens as the market price rises?

Accepted Answer

Firms with higher AVC start producing (extensive margin adjustment)

The Competitive Firm and Market Supply Curves: Principles and Applications

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