Question 1

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

Accepted Answer

Firms can influence the price of their product.

Question 2

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

Accepted Answer

Horizontal at the market price because the firm is a price taker.

Question 3

Suppose a wheat farmer considers increasing output. Why does this farmer face a horizontal demand curve?

Accepted Answer

Because any increase in the farmer's output has a negligible effect on market price.

Question 4

A competitive firm will maximize profit by producing the quantity where:

Accepted Answer

$$MR = MC$$

Question 5

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

Accepted Answer

Shut down and produce nothing.

Question 6

Which formula correctly expresses a competitive firm's profit ($$\pi) in $$terms of price ($$p$$), average total cost ($$c$$), and quantity ($$Q$$)?

Accepted Answer

$$\pi = (p - c)Q$$

Question 7

In the short run, a competitive firm's supply curve is:

Accepted Answer

Its marginal cost curve above the average variable cost curve.

Question 8

What happens in a competitive industry when existing firms are earning positive economic profits?

Accepted Answer

New firms enter, increasing supply and lowering price.

Question 9

A hotel stays open during the off-season even though its rates do not cover total costs. According to economic theory, why does it remain open?

Accepted Answer

Because it covers its variable costs and contributes to fixed costs.

Question 10

In long-run equilibrium in a perfectly competitive industry, what is true about firms' profits?

Accepted Answer

Firms earn zero economic profits (break even).

Question 11

Which of the following best describes the break-even price in a competitive market?

Accepted Answer

The price at which a firm covers all costs, including opportunity cost of capital.

Question 12

If technological progress lowers the cost of new plants in a competitive industry, what is the likely long-run outcome?

Accepted Answer

Industry output expands, price falls, and old plants eventually exit.

Question 13

Which equation correctly defines marginal revenue ($$MR) $$for a competitive firm?

Accepted Answer

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

Question 14

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

Accepted Answer

It remains because the decline in demand makes replacement unprofitable.

Question 15

Which of the following is true about competitive behaviour and competitive markets?

Accepted Answer

Firms can engage in competitive behaviour even in non-competitive markets.

Question 16

If a competitive firm is producing at a quantity where $$p = MC  AVC$$, what is the firm's short-run situation?

Accepted Answer

The firm is making economic losses but should continue producing.

Question 17

In the long run, what must be true for all firms in a perfectly competitive industry?

Accepted Answer

Each firm must be operating at the minimum point of its LRAC curve.

Question 18

Which of the following best describes the supply curve of a perfectly competitive industry?

Accepted Answer

The horizontal sum of all firms' MC curves above AVC.

Question 19

A firm in a competitive market is deciding whether to produce. If its total revenue ($$TR) is $$less than its total variable cost ($$TVC$$), what is the profit-maximizing decision?

Accepted Answer

Shut down and produce nothing.

Question 20

Which of the following is a real-world example illustrating the effect of substitutes in a declining industry?

Accepted Answer

The introduction of kerosene leading to the decline of the whaling industry.

Competitive Markets: Theory and Application (Microeconomics Chapter 9 Study Notes)

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