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

$$MR = MC$$

Question 3

Suppose a wheat farmer faces a market price of $$P^*. At $$the profit-maximizing output $$Q^*$$, the farmer's average total cost is above $$P^*. $$What does the shaded area between $$ATC(Q^*)$$ and $$P^*$$ represent in the first image?

Accepted Answer

Economic loss

Question 4

If a competitive firm is producing at a price below its average variable cost, what should the firm do in the short run?

Accepted Answer

Shut down production

Question 5

Which of the following correctly describes the supply curve of a competitive firm in the short run?

Accepted Answer

The portion of the MC curve above the minimum AVC

Question 6

Jake is considering opening a food stall. His expected total revenue is $$130,000. $$His explicit costs are: rent $$10,000$$, wages $$20,000$$, utilities $$5,000$$, interest $$5,000$$, raw materials $$40,000. $$What are his total explicit costs?

Accepted Answer

$$80,000$$

Question 7

Using Jake's scenario, if he must quit a job paying $$40,000$$ per year, what is his expected accounting profit?

Accepted Answer

$$50,000$$

Question 8

In the long-run equilibrium of a perfectly competitive market, what is true about economic profit?

Accepted Answer

Economic profit is zero

Question 9

Which of the following best explains why a competitive firm can earn rent but not profit in long-run equilibrium?

Accepted Answer

Rent is payment to a fixed factor, while profit is competed away by entry and exit

Question 10

If the market price is below a firm's average total cost but above its average variable cost, what should the firm do in the short run?

Accepted Answer

Continue producing to minimize losses

Question 11

Which equation correctly represents a competitive firm's profit?

Accepted Answer

$$	ext{Profit} = TR - TC$$

Question 12

In the second image, what does the shaded area labeled 'Fixed cost' represent if the firm shuts down?

Accepted Answer

The loss the firm incurs if it shuts down

Question 13

Suppose all firms in a market are identical and there are no sunk costs. In long-run equilibrium, what is the relationship between price and average cost?

Accepted Answer

$$P = \min AC$$

Question 14

If a firm is producing where $$P = AVC$$ but $$P \u003c ATC$$, what is true about its profit?

Accepted Answer

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

Question 15

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

Accepted Answer

The firm can influence the market price

Question 16

If the market price increases, what happens to the quantity supplied by a competitive firm in the short run?

Accepted Answer

The firm increases output along its MC curve above AVC

Question 17

Which of the following best describes the market supply curve in a perfectly competitive market with identical firms?

Accepted Answer

The horizontal sum of all individual firms' supply curves

Question 18

In the third image, what does the shaded area represent?

Accepted Answer

Economic profit

Question 19

If a firm is earning zero economic profit in equilibrium, what does this imply about its total revenue and total cost?

Accepted Answer

$$TR = TC$$

Question 20

Which of the following is true about the marginal firm in long-run equilibrium in a competitive market?

Accepted Answer

It earns zero profit and zero rent

The Competitive Firm and Market Supply Curves

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