Q: A firm’s profit is given by the formula $$Profit = (P - ATC) \times Q. If$$ $$P = 10$$, $$ATC = 8$$, and $$Q = 100$$, what is the profit?

$$Profit = (10 - 8) \times 100 = 200$$

Question 1

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

Accepted Answer

Products are highly differentiated.

Question 2

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

Accepted Answer

Horizontal at the market price.

Question 3

Suppose the market price for wheat is $$4 per bushel. If a perfectly competitive firm sells 5 bushels, what is its total revenue? Use the formula TR = P$$ 	imes Q$.

Accepted Answer

$$TR = 4 	imes 5 = 20$$

Question 4

In perfect competition, which of the following relationships always holds?

Accepted Answer

$$P = AR = MR$$

Question 5

A firm maximizes profit by producing the quantity where:

Accepted Answer

$$MR = MC$$

Question 6

If a perfectly competitive firm is producing at a price below its average variable cost, what should it do in the short run?

Accepted Answer

Shut down production.

Question 7

A farmer pays $$1,000 to rent a field (fixed cost) and 200 $$for seeds (variable cost). If expected revenue is $500, what is the best short-run decision?

Accepted Answer

Produce, because revenue covers variable costs.

Question 8

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

Accepted Answer

$$P \u003c ATC$$

Question 9

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

Accepted Answer

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

Question 10

If the market price is $$P_1$$ and $$P_1$$ \u003e ATC$$ at the profit-maximizing output, what is the firm's economic situation?

Accepted Answer

The firm is earning an economic profit.

Question 11

Suppose a new health study increases demand for garlic, shifting the demand curve right. In the short run, what happens to price and profit for existing garlic firms?

Accepted Answer

Price rises; profit rises.

Question 12

In the long run, what happens to economic profit in a perfectly competitive market?

Accepted Answer

Firms earn zero economic profit.

Question 13

Which of the following is true about productive efficiency in perfect competition?

Accepted Answer

Firms produce at the lowest point on the average total cost curve.

Question 14

Allocative efficiency in perfect competition is achieved when:

Accepted Answer

$$P = MC$$

Question 15

If a perfectly competitive firm’s marginal cost is below the market price, what should the firm do?

Accepted Answer

Increase output.

Question 16

A firm’s profit is given by the formula $$Profit = (P - ATC) 	imes Q. If$$ $$P = 10$$, $$ATC = 8$$, and $$Q = 100$$, what is the profit?

Accepted Answer

$$Profit = (10 - 8) 	imes 100 = 200$$

Question 17

Which of the following is a sunk cost for a firm in the short run?

Accepted Answer

The non-refundable payment for renting land.

Question 18

If the price falls below the minimum of the average variable cost curve, what is the firm’s best short-run decision?

Accepted Answer

Shut down immediately.

Question 19

In the short run, the market supply curve in perfect competition is:

Accepted Answer

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

Question 20

When a perfectly competitive firm is producing at $$P = MC = minimum ATC$$, what is true for the market?

Accepted Answer

Total surplus is at a maximum.

Firms in Perfectly Competitive Markets: Microeconomics Study Notes

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