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Perfect Competition and Efficiency quiz #1

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  • What happens in a perfectly competitive industry when economic profit is greater than zero?
    When economic profit is greater than zero in a perfectly competitive industry, new firms are attracted to enter the market. This increases the industry supply, which causes the market price to fall. Entry continues until economic profit is eliminated and firms earn zero economic profit in the long run, achieving productive and allocative efficiency.
  • What is the condition for productive efficiency in a perfectly competitive market?
    Productive efficiency occurs when firms produce at the minimum of their average total cost (ATC). This means they are producing at the lowest possible cost.
  • How does perfect competition force firms to be efficient?
    Perfect competition forces firms to lower their costs as much as possible to remain profitable. This results in production at the minimum ATC.
  • What does allocative efficiency mean in terms of consumer preferences?
    Allocative efficiency means that production represents consumer preferences. It is achieved when the marginal benefit to consumers equals the marginal cost to producers.
  • In perfect competition, what does the equilibrium price represent for the last unit sold?
    The equilibrium price represents the marginal benefit to the last consumer who purchases the good. It is the value that matches their willingness to pay.
  • How do firms in perfect competition decide the quantity to produce?
    Firms produce where marginal revenue equals marginal cost. In perfect competition, marginal revenue is equal to the market price.
  • Why does price equal marginal cost in perfect competition?
    In perfect competition, firms are price takers and must sell at the market price. They produce where price equals marginal cost to maximize profit.
  • What is the relationship between price, marginal benefit, and marginal cost in perfect competition?
    In perfect competition, price equals both marginal benefit to consumers and marginal cost to producers. This ensures both productive and allocative efficiency.
  • Do other market structures achieve both productive and allocative efficiency?
    No, other market structures do not achieve both productive and allocative efficiency. This is a unique feature of perfect competition.
  • What is the significance of the downward sloping demand curve in perfect competition?
    The downward sloping demand curve shows that different consumers have different willingness to pay. The equilibrium price matches the marginal benefit of the last unit sold.