Q: Which of the following equations correctly represents profit?

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

Q: If a firm’s marginal cost curve is above its average variable cost curve, what does this indicate?

Average variable cost is rising

Q: If a firm’s total cost at 200 units is $1200$ and the market price is $8$, what is the firm’s profit?

$(8 \times 200) - 1200 = 1600 - 1200 = 400$

Q: Which of the following best explains why a perfectly competitive firm’s demand curve is perfectly elastic?

The firm can sell any quantity at the market price but none at a higher price

Q: Which shaded area on a cost curve graph represents economic profit?

The area between price and average total cost, up to the profit-maximizing quantity

Q: Which of the following is the correct formula for average variable cost (AVC)?

$AVC = \frac{\text{Total Variable Cost}}{\text{Quantity}}$

Question 1

In a perfectly competitive market, at what point does a firm maximize its profit?

Accepted Answer

Where $MR = MC$

Question 2

A perfectly competitive firm should stop producing additional units when:

Accepted Answer

The marginal cost of the next unit exceeds marginal revenue

Question 3

Which of the following best describes the characteristics of a perfectly competitive market?

Accepted Answer

Many buyers and sellers, identical products, firms are price takers

Question 4

If the market price is $10$, the marginal cost of producing the 100th unit is $10$, and the average total cost at 100 units is $8$, what is the economic profit for producing 100 units?

Accepted Answer

$(10 - 8) 	imes 100 = 200$

Question 5

Which of the following equations correctly represents profit?

Accepted Answer

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

Question 6

A firm in perfect competition is considered a price taker because:

Accepted Answer

It cannot influence the market price and must accept the equilibrium price

Question 7

If a perfectly competitive firm faces a market price below its average variable cost, what should it do in the short run?

Accepted Answer

Shut down production immediately

Question 8

Suppose a cotton farmer’s total revenue is $5000$ and total cost is $4000$. What is the area of economic profit?

Accepted Answer

$5000 - 4000 = 1000$

Question 9

Which of the following is the correct shutdown rule for a perfectly competitive firm in the short run?

Accepted Answer

Shut down if $P < AVC$

Question 10

If a firm’s marginal cost curve is above its average variable cost curve, what does this indicate?

Accepted Answer

Average variable cost is rising

Question 11

At what output level does a perfectly competitive firm maximize profit?

Accepted Answer

Where $P = MC$

Question 12

If a firm’s total cost at 200 units is $1200$ and the market price is $8$, what is the firm’s profit?

Accepted Answer

$(8 	imes 200) - 1200 = 1600 - 1200 = 400$

Question 13

Which of the following is NOT a characteristic of perfect competition?

Accepted Answer

Firms can set their own prices

Question 14

If a firm’s average total cost is $5$ and the market price is $7$, what is the per-unit economic profit?

Accepted Answer

$7 - 5 = 2$

Question 15

Which of the following best explains why a perfectly competitive firm’s demand curve is perfectly elastic?

Accepted Answer

The firm can sell any quantity at the market price but none at a higher price

Question 16

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

Accepted Answer

Increase output

Question 17

Which shaded area on a cost curve graph represents economic profit?

Accepted Answer

The area between price and average total cost, up to the profit-maximizing quantity

Question 18

If a firm is producing at a quantity where $MR > MC$, what should it do?

Accepted Answer

Increase output

Question 19

Which of the following is the correct formula for average variable cost (AVC)?

Accepted Answer

$AVC = \frac{	ext{Total Variable Cost}}{	ext{Quantity}}$

Profit Maximization and Perfect Competition: Key Concepts and Calculations

Study Guide - Practice Questions

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