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

Which of the following is the profit-maximizing condition for a competitive firm?

Accepted Answer

$$MR = MC$$

Question 3

Suppose a competitive firm faces a market price $$P^*$$ and chooses output $$Q^*$$ such that $$P^*  AVC(Q^*). $$What is the firm's short-run decision?

Accepted Answer

Continue producing in the short run despite making a loss

Question 4

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 profit-maximizing output

Question 5

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 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

Given Jake's explicit costs ($$80,000) $$and his opportunity cost of quitting a $$40,000$$ job, what is his economic profit if his total revenue is $$130,000$$?

Accepted Answer

$$10,000$$

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 describes the individual supply curve of a competitive firm?

Accepted Answer

The portion of the MC curve above the minimum AVC

Question 10

If the market price is below a firm's average variable cost at all output levels, what will happen in the short run?

Accepted Answer

The firm will shut down and produce zero output

Question 11

Why can a firm stay in business in the long run even if it earns zero economic profit?

Accepted Answer

Because all opportunity costs, including normal profit, are covered

Question 12

Suppose all firms in a market are identical and there are no sunk costs. What does the market supply curve look like in the long run equilibrium?

Accepted Answer

Flat at $$P = minAC$$

Question 13

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

Accepted Answer

New firms will enter, driving profit to zero

Question 14

Which of the following is true at the shutdown point for a competitive firm?

Accepted Answer

$$P = minAVC$$

Question 15

A competitive firm’s total variable cost (TVC) can be found as:

Accepted Answer

The area under the MC curve up to the chosen output

Question 16

If the market price is equal to the minimum average total cost, what is the firm’s profit?

Accepted Answer

Zero

Question 17

Which of the following best describes the difference between profit and rent for a competitive firm?

Accepted Answer

Profit includes both fixed and variable costs, while rent is revenue minus avoidable variable costs

Question 18

In the context of market supply, what is meant by 'intensive margin adjustment'?

Accepted Answer

Existing firms increase their output as price rises

Question 19

In the context of market supply, what is meant by 'extensive margin adjustment'?

Accepted Answer

New firms with higher AVC start producing as price rises

Question 20

In long-run equilibrium, what do intra-marginal firms earn?

Accepted Answer

Zero profit and positive rent

The Competitive Firm and Market Supply Curves: Microeconomics Study Notes

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