Question 1

Which of the following is NOT an assumption of the theory of perfect competition?

Accepted Answer

Firms can influence the market price through their individual output decisions.

Question 2

In a perfectly competitive market, the demand curve faced by an individual firm is:

Accepted Answer

Perfectly elastic at the market price.

Question 3

Suppose a wheat farmer in a perfectly competitive market increases her output. What happens to the market price?

Accepted Answer

The market price remains unchanged.

Question 4

A competitive firm’s marginal revenue (MR) is given by which of the following equations?

Accepted Answer

$$MR = \frac{\Delta TR}{\Delta Q}$$

Question 5

If a firm’s total revenue is less than its total variable cost at all levels of output, what should the firm do in the short run?

Accepted Answer

Shut down and produce nothing.

Question 6

The shut-down price for a competitive firm is:

Accepted Answer

The price at which price equals the minimum average variable cost.

Question 7

A competitive firm maximizes profit by producing the quantity where:

Accepted Answer

$$MR = MC$$

Question 8

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 average variable cost curve.

Question 9

In the short run, a competitive firm will continue to produce even if it is making losses as long as:

Accepted Answer

Price is greater than average variable cost.

Question 10

If existing firms in a competitive industry are earning positive economic profits, what will happen in the long run?

Accepted Answer

New firms will enter, increasing supply and lowering price.

Question 11

The break-even price in a competitive market is:

Accepted Answer

The price at which a firm’s total revenue equals its total cost, including opportunity cost.

Question 12

Which of the following is a condition for long-run equilibrium in a perfectly competitive industry?

Accepted Answer

Firms are maximizing profits and earning zero economic profit.

Question 13

Suppose a technological innovation lowers the cost of new plants in a competitive industry. What is the likely long-run outcome?

Accepted Answer

Firms with new technology will earn profits, attracting entry and eventually driving price down.

Question 14

In a declining competitive industry, what typically happens to firms with antiquated equipment?

Accepted Answer

They remain as a result of the industry’s decline.

Question 15

If a competitive firm is producing at a level where $$MC \u003e MR$$, what should the firm do to maximize profit?

Accepted Answer

Decrease output.

Question 16

Which of the following equations correctly represents total revenue for a competitive firm?

Accepted Answer

$$TR = p 	imes Q$$

Question 17

A hotel stays open during the off-season even though it does not cover its full costs. According to economic theory, why might this be rational?

Accepted Answer

Revenue during the off-season covers variable costs and some fixed costs.

Question 18

Which of the following best describes the industry supply curve in perfect competition?

Accepted Answer

The horizontal sum of all firms’ marginal cost curves above AVC.

Question 19

If a competitive firm is not at the minimum point of its long-run average cost curve, what does this imply?

Accepted Answer

The firm can reduce average total costs by adjusting its plant size.

Question 20

Which of the following is an example of competitive behaviour but NOT a competitive market?

Accepted Answer

MasterCard and Visa actively vying for customers.

Competitive Markets and Perfect Competition: Study Notes

Study Guide - Practice Questions