Q: If a competitive firm is producing at a quantity where $$P \u003e ATC$$, what is the firm’s profit?

Profit is positive and given by $$Profit = (P - ATC) \times Q.$$

Question 1

In a perfectly competitive market, which of the following statements is TRUE regarding the relationship between price, average revenue, and marginal revenue for a firm?

Accepted Answer

Price equals both average revenue and marginal revenue: $$P = AR = MR.$$

Question 2

A competitive firm maximizes profit by producing the quantity at which marginal cost equals marginal revenue. If the market price is $$10$$, and the firm's marginal cost at $$Q=50$$ units is $$10$$, what should the firm do?

Accepted Answer

Maintain production at $$Q=50$$ units because $$MC = MR = P.$$

Question 3

Suppose a restaurant is nearly empty during lunch hours. According to microeconomic theory, when should the restaurant decide to stay open for lunch?

Accepted Answer

If the revenue from lunch is greater than the variable costs.

Question 4

In the short run, a competitive firm will shut down if:

Accepted Answer

Price is less than average variable cost: $$P \u003c AVC.$$

Question 5

Which of the following best describes a sunk cost?

Accepted Answer

A cost that has already been committed and cannot be recovered.

Question 6

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

Accepted Answer

The portion of its marginal-cost curve that lies above average variable cost.

Question 7

In the long run, a competitive firm will exit the market if:

Accepted Answer

Price is less than average total cost: $$P \u003c ATC.$$

Question 8

If a competitive firm is producing at a quantity where $$P \u003e ATC$$, what is the firm’s profit?

Accepted Answer

Profit is positive and given by $$Profit = (P - ATC) 	imes Q.$$

Question 9

In the long run, the process of entry and exit in a competitive market ends when:

Accepted Answer

Firms make zero economic profit and $$P = ATC.$$

Question 10

Why do competitive firms stay in business if they make zero economic profit in the long run?

Accepted Answer

Because accounting profit is positive even when economic profit is zero.

Question 11

If the market price increases from $$P_1 to$$ $$P_2$$, what happens to the profit-maximizing quantity for a competitive firm?

Accepted Answer

The profit-maximizing quantity increases.

Question 12

Suppose a miniature golf course operator is deciding whether to stay open during the off-season. Which costs should the operator ignore when making this decision?

Accepted Answer

Fixed costs, because they are sunk in the short run.

Question 13

In the short run, the market supply curve in a competitive market is determined by:

Accepted Answer

The sum of the marginal-cost curves above average variable cost for all firms.

Question 14

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

Accepted Answer

Decrease output.

Question 15

Which of the following is TRUE about the long-run supply curve in a perfectly competitive market with free entry and exit?

Accepted Answer

It is horizontal at the minimum average total cost.

Question 16

After an increase in demand in a competitive market, what happens in the short run and long run?

Accepted Answer

Short run: price and quantity increase, firms earn profits; long run: new firms enter, price returns to minimum ATC, quantity increases.

Question 17

If a firm’s total revenue is less than its variable costs in the short run, what is the best decision for the firm?

Accepted Answer

Shut down temporarily.

Question 18

Which equation correctly measures a firm’s loss when $$P \u003c ATC$$?

Accepted Answer

Loss $$= (ATC - P) 	imes Q$$

Question 19

Which of the following is a characteristic of a perfectly competitive market?

Accepted Answer

Firms can freely enter or exit the market.

Firms in Competitive Markets: Profit Maximization and Supply Decisions

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