Question 1

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

Accepted Answer

Each firm can set its own price above the market price.

Question 2

Suppose a competitive firm faces a market price of $$10 per unit. Its marginal cost (MC) is given by MC = 2q$, where q$ is the quantity produced. What is the profit-maximizing output level for the firm?

Accepted Answer

$$q = 5$$

Question 3

A competitive firm’s total revenue is $$R = 2,000$$, its variable cost is $$VC = 1,500$$, and its fixed cost is $$FC = 1,000. $$According to the shutdown rule, should the firm continue operating in the short run?

Accepted Answer

Yes, because revenue exceeds variable cost.

Question 4

If a competitive firm’s marginal cost curve is $$MC = 4 + 2q$$ and its average variable cost is minimized at $$q = 2$$ with $$AVC = 6$$, what is the lowest price at which the firm will produce in the short run?

Accepted Answer

$$P = 6$$

Question 5

Which of the following best describes the short-run supply curve of a competitive firm?

Accepted Answer

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

Question 6

A competitive firm’s bookkeeper discovers that fixed costs are higher than previously thought. How should the firm adjust its output decision in the short run?

Accepted Answer

The firm should not change its output decision.

Question 7

If a per-unit tax $$t is $$imposed on all firms in a competitive market, what is the immediate effect on the market equilibrium price and quantity in the short run?

Accepted Answer

The equilibrium price rises and the equilibrium quantity falls.

Question 8

In the long run, if all firms in a competitive market are identical and input prices are constant, what does the long-run market supply curve look like?

Accepted Answer

A horizontal line at the minimum long-run average cost.

Question 9

Which of the following scenarios would cause the long-run market supply curve to slope upward?

Accepted Answer

Input prices rise as industry output increases.

Question 10

Suppose the market demand for a product increases in a perfectly competitive industry with free entry and identical firms. In the long run, what happens to the equilibrium price and quantity?

Accepted Answer

The equilibrium quantity increases, but the equilibrium price remains unchanged.

Question 11

A competitive firm faces a market price of $$P = 15. $$Its marginal cost is $$MC = 3 + q. $$What is the profit-maximizing output?

Accepted Answer

$$q = 12$$

Question 12

If a competitive firm’s revenue is less than its avoidable variable cost, what should the firm do in the short run?

Accepted Answer

Shut down and produce no output.

Question 13

Which of the following best explains why a competitive firm is a price taker?

Accepted Answer

Its output is small relative to the total market, so it cannot influence the market price.

Question 14

If the elasticity of market demand is $$\varepsilon = -0.5$$, the elasticity of supply of other firms is $$\eta_O = 10$$, and there are $$n = 50$$ identical firms, what is the elasticity of demand facing a single firm?

Accepted Answer

$$\varepsilon_i = n \eta_O + \varepsilon = 50 	imes 10 + (-0.5) = 499.5$$

Question 15

In the short run, what happens to the market price of gasoline in a state that requires a special blend when demand increases during the summer?

Accepted Answer

The price rises more than in areas with regular gasoline due to limited supply flexibility.

Question 16

Which of the following is true about economic profit in long-run competitive equilibrium?

Accepted Answer

Firms earn zero economic profit.

Question 17

A competitive firm’s long-run supply curve is:

Accepted Answer

Its long-run marginal cost curve above the minimum of its long-run average cost curve.

Question 18

If the government restricts the number of firms in a market, what is the likely effect on the long-run market supply curve?

Accepted Answer

The long-run market supply curve will slope upward.

Question 19

Which of the following best describes the residual supply curve in a market with a large buyer?

Accepted Answer

It is the quantity supplied to the market that is not consumed by other demanders at any given price.

Competitive Firms and Markets: Study Notes

Study Guide - Practice Questions

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