Q: If a firm’s total revenue is $$TR = P \times Q$$ and total cost is $$TC = ATC \times Q$$, which formula correctly calculates profit?

$$Profit = (P - ATC) \times Q$$

Question 1

In a perfectly competitive market, which of the following statements is TRUE about the demand curve facing an individual firm?

Accepted Answer

It is horizontal at the market price because the firm is a price taker.

Question 2

Suppose a firm in a perfectly competitive market faces a market price $$P = 100. $$Its total cost function is $$TC(Q) = 20 + 40Q + 10Q^2$. What is the profit-maximizing output level?

Accepted Answer

$$Q = 4$$

Question 3

A firm in a perfectly competitive market will shut down in the short run if:

Accepted Answer

$$P \u003c AVC$$

Question 4

If a firm’s total cost is $$TC(Q) = 5Q^2$ and the market price is P = 200$, what is the firm’s profit-maximizing output and profit?

Accepted Answer

$$Q = 20$$, Profit = $$2,000$$

Question 5

In the long run, if firms in a perfectly competitive market are earning positive economic profits, what will happen?

Accepted Answer

New firms will enter the market, shifting the market supply curve right and lowering the price.

Question 6

Which of the following is the correct condition for profit maximization for a perfectly competitive firm?

Accepted Answer

$$P = MC$$

Question 7

Suppose the market price falls below a firm’s average variable cost at all output levels. What is the firm’s optimal short-run decision?

Accepted Answer

Shut down and produce zero output.

Question 8

If a firm’s total revenue is $$TR = P 	imes Q$$ and total cost is $$TC = ATC 	imes Q$$, which formula correctly calculates profit?

Accepted Answer

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

Question 9

A perfectly competitive firm is producing at a level where $$P = MC = ATC. $$What can we conclude about the firm’s profit?

Accepted Answer

The firm is earning zero economic profit.

Question 10

Suppose a firm’s average variable cost is minimized at $$Q = 10$$ units and $$AVC = 50. If $$the market price is $$P = 40$$, what should the firm do in the short run?

Accepted Answer

Shut down, since $$P \u003c AVC.$$

Question 11

If the long-run supply curve in a perfectly competitive market is horizontal, which of the following must be TRUE?

Accepted Answer

All firms have identical costs and input prices do not change as the industry expands.

Question 12

A firm’s marginal cost curve above the average variable cost curve represents:

Accepted Answer

The firm’s short-run supply curve.

Question 13

Suppose the market price is $$P = 120$$, the firm’s marginal cost at $$Q = 6 is$$ $$MC = 120$$, and average total cost at $$Q = 6 is$$ $$ATC = 90. $$What is the firm’s profit?

Accepted Answer

$$180$$

Question 14

If a firm’s total cost increases from $$11,000 to$$ $$15,000 as $$output increases from $$1,000 to$$ $$1,200$$ units, what does this indicate about economies of scale?

Accepted Answer

The firm experiences economies of scale because average total cost falls as output rises.

Question 15

Which of the following best describes the long-run equilibrium in a perfectly competitive market?

Accepted Answer

Firms produce where $$P = MC = min(ATC)$$ and earn zero economic profit.

Question 16

If the market price is above a firm’s average total cost, what will happen in the long run in a perfectly competitive market?

Accepted Answer

New firms will enter, increasing supply and driving price down to ATC.

Question 17

Which of the following is NOT an assumption of the perfectly competitive market model?

Accepted Answer

Firms can influence the market price.

Question 18

Suppose a technological improvement lowers the average total cost for all firms in a perfectly competitive market. In the long run, what is the likely effect on the market price?

Accepted Answer

The market price will fall to the new minimum ATC.

Question 19

If a firm’s marginal cost is always above its average variable cost, what does this imply about the firm’s short-run supply curve?

Accepted Answer

The firm’s short-run supply curve is its entire marginal cost curve.

Question 20

A perfectly competitive firm is currently producing where $$P = MC = 50$$ and $$ATC = 60. $$What should the firm do in the long run?

Accepted Answer

Exit the market, since $$P \u003c ATC.$$

Firms in Perfectly Competitive Markets: Profit Maximization, Supply, and Long-Run Equilibrium

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