Question 1

In a perfectly competitive market, which condition must be true for a firm to maximize profit?

Accepted Answer

Produce where $MR = MC$

Question 2

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

Accepted Answer

Horizontal at the market price

Question 3

Suppose the market price falls below a firm's average variable cost ($AVC$). What should the firm do in the short run?

Accepted Answer

Shut down temporarily

Question 4

Which equation correctly represents the profit-maximizing condition for a perfectly competitive firm?

Accepted Answer

$P = MC$

Question 5

If firms in a perfectly competitive market are earning economic profits in the short run, what will happen in the long run?

Accepted Answer

New firms will enter, driving profits to zero

Question 6

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

Accepted Answer

Barriers to entry

Question 7

A firm in perfect competition will continue to produce in the short run as long as:

Accepted Answer

$P \geq AVC$

Question 8

Which of the following best explains why perfectly competitive markets are allocatively efficient in the long run?

Accepted Answer

Price equals marginal cost ($P = MC$)

Question 9

In the long run, what is the economic profit for firms in a perfectly competitive market?

Accepted Answer

Zero, due to free entry and exit

Question 10

If the market price is $P_1$ and the firm's $MC$ curve is above $AVC$ at $Q_1$, what will the firm do?

Accepted Answer

Produce at $Q_1$

Question 11

Which of the following statements about barriers to entry in perfect competition is correct?

Accepted Answer

Barriers to entry are low in the long run

Question 12

In a perfectly competitive market, the long-run supply curve for a constant cost industry is:

Accepted Answer

Horizontal

Question 13

Which of the following industries is most likely to be an example of an increasing cost industry?

Accepted Answer

Precious metals (mining)

Question 14

A perfectly competitive firm’s supply curve in the short run is:

Accepted Answer

The portion of the $MC$ curve above the $AVC$

Question 15

If a perfectly competitive firm is producing where $P < ATC$ but $P > AVC$, what is the firm’s short-run situation?

Accepted Answer

Economic loss but continues to operate

Question 16

Which of the following is true about productive efficiency in perfect competition?

Accepted Answer

Firms produce at the minimum of the $ATC$ curve in the long run

Question 17

Suppose the market supply curve shifts right due to new firms entering. What happens to the equilibrium price and profit for existing firms?

Accepted Answer

Price falls and profits decrease

Question 18

In a perfectly competitive market, which formula represents total profit at a given output level?

Accepted Answer

$Profit = TR - TC$

Question 19

Which of the following best describes the long-run adjustment process in a perfectly competitive market when firms are incurring losses?

Accepted Answer

Firms exit the market, decreasing supply

Question 20

In an increasing cost industry, what happens to the firm’s $ATC$ and $MC$ curves as market output increases?

Accepted Answer

Both curves shift upward

Study Notes: Perfectly Competitive Markets in Macroeconomics

Study Guide - Practice Questions