Q: If a perfectly competitive firm is producing at a point where $P < AVC$, what should the firm do in the short run?

Shut down production temporarily

Q: Which of the following best describes the demand curve faced by an individual firm in a perfectly competitive market?

Perfectly elastic (horizontal) at the market price

Q: Suppose a monopolistically competitive firm is making positive economic profits in the short run. What will happen in the long run, assuming free entry and exit?

New firms will enter, shifting the demand curve left until profits are zero

Q: Which of the following is a key difference between perfect competition and monopolistic competition in the long run?

Perfectly competitive firms produce at minimum ATC; monopolistically competitive firms do not

Q: If the price elasticity of demand for a product is $E_p = -0.5$, what does this imply about consumer responsiveness and total revenue if the price increases?

Demand is inelastic; total revenue will increase

Q: Which of the following best explains why monopolistically competitive firms have excess capacity in the long run?

They produce less than the output that minimizes $ATC$

Question 1

Suppose the price of a required textbook increases by 40%, but the quantity demanded decreases by only 10%. What type of price elasticity of demand does this scenario illustrate, and what is the likely value of the elasticity coefficient?

Accepted Answer

Inelastic demand; elasticity coefficient less than 1

Question 2

A perfectly competitive firm faces a market price of $8 per unit. If the firm increases its output by 1 unit, what is the marginal revenue (MR) it will receive, and why?

Accepted Answer

$8, because in perfect competition MR = P

Question 3

Which of the following formulas correctly calculates the price elasticity of demand ($E_p$) using the midpoint method?

Accepted Answer

$E_p = \frac{(Q_2 - Q_1)/[(Q_2 + Q_1)/2]}{(P_2 - P_1)/[(P_2 + P_1)/2]}$

Question 4

A city government imposes a binding rent ceiling below the equilibrium price for apartments. In the long run, what is the most likely outcome in the housing market?

Accepted Answer

A shortage of apartments and the emergence of black markets

Question 5

In a perfectly competitive market, which of the following conditions must be true for a firm to maximize its profit?

Accepted Answer

$MR = MC$

Question 6

If a perfectly competitive firm is producing at a point where $P < AVC$, what should the firm do in the short run?

Accepted Answer

Shut down production temporarily

Question 7

Which of the following best describes the demand curve faced by an individual firm in a perfectly competitive market?

Accepted Answer

Perfectly elastic (horizontal) at the market price

Question 8

A monopolistically competitive firm in the short run maximizes profit by producing the quantity where:

Accepted Answer

$MR = MC$

Question 9

Suppose a monopolistically competitive firm is making positive economic profits in the short run. What will happen in the long run, assuming free entry and exit?

Accepted Answer

New firms will enter, shifting the demand curve left until profits are zero

Question 10

Which of the following is a key difference between perfect competition and monopolistic competition in the long run?

Accepted Answer

Perfectly competitive firms produce at minimum ATC; monopolistically competitive firms do not

Question 11

If the price elasticity of demand for a product is $E_p = -0.5$, what does this imply about consumer responsiveness and total revenue if the price increases?

Accepted Answer

Demand is inelastic; total revenue will increase

Question 12

A firm in a perfectly competitive market is currently producing where $P = ATC > AVC$. What is the firm's economic profit?

Accepted Answer

Zero economic profit

Question 13

Which of the following is NOT a determinant of the price elasticity of demand for a good?

Accepted Answer

The cost of production

Question 14

In the long run, a perfectly competitive firm will exit the industry if:

Accepted Answer

$P < min ATC$

Question 15

Which of the following best explains why monopolistically competitive firms have excess capacity in the long run?

Accepted Answer

They produce less than the output that minimizes $ATC$

Question 16

Suppose the government sets a price ceiling above the equilibrium price. What is the likely effect on the market?

Accepted Answer

It is not binding and has no effect on the market outcome

Question 17

A firm’s short-run supply curve in perfect competition is:

Accepted Answer

The portion of the marginal cost curve above the average variable cost

Question 18

If a monopolistically competitive firm increases its advertising budget, which of the following is a possible effect according to defenders of advertising?

Accepted Answer

It provides information to consumers and increases competition

Question 19

Deadweight loss (DWL) in monopolistic competition arises because:

Accepted Answer

Price exceeds marginal cost, so output is less than the efficient level

Microeconomics Study Guide: Elasticity, Market Structures, and Labour Demand

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