Q: If the market price is $$7 and the average total cost (ATC) at the profit-maximizing output is 5$$, and the firm produces 10 units, what is the firm's total profit? Use $$\text{Profit} = (P - ATC) \times Q.$$

$$\text{Profit} = (7 - 5) \times 10 = 20$$

Question 1

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

Accepted Answer

There are significant barriers to entry.

Question 2

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

Accepted Answer

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

Question 3

Suppose the market price for wheat is $$7 per bushel. If a farmer sells 8 bushels, what is the total revenue? Use the formula TR = P$$ 	imes Q$.

Accepted Answer

$$TR = 7 	imes 8 = 56$$

Question 4

A firm in a perfectly competitive market maximizes profit by producing the quantity where:

Accepted Answer

$$MR = MC$$

Question 5

If the market price is $$7 and the average total cost (ATC) at the profit-maximizing output is 5$$, and the firm produces 10 units, what is the firm's total profit? Use $$	ext{Profit} = (P - ATC) 	imes Q.$$

Accepted Answer

$$	ext{Profit} = (7 - 5) 	imes 10 = 20$$

Question 6

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

Accepted Answer

Firms earn zero economic profit (break even).

Question 7

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

Accepted Answer

Shut down production immediately.

Question 8

Which equation represents the shutdown point for a perfectly competitive firm?

Accepted Answer

$$P = AVC_{min}$$

Question 9

If the price of cage-free eggs rises above the long-run equilibrium, what will happen in the market?

Accepted Answer

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

Question 10

Which of the following is an example of a sunk cost for a wheat farmer?

Accepted Answer

The monthly loan payment on land already purchased.

Question 11

In the short run, the supply curve for a perfectly competitive firm is:

Accepted Answer

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

Question 12

Allocative efficiency in a perfectly competitive market occurs when:

Accepted Answer

Price equals marginal cost ($$P = MC).$$

Question 13

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

Accepted Answer

Increase output.

Question 14

Which of the following best explains why firms in perfectly competitive markets are price takers?

Accepted Answer

Each firm’s output is a tiny fraction of total market output and products are identical.

Question 15

Suppose a poultry farmer’s total cost is $$90,000, and she sells 50,000 dozen eggs at 3 $$per dozen. What is her economic profit?

Accepted Answer

$$60,000$$

Question 16

Which of the following is true about productive efficiency in a perfectly competitive market?

Accepted Answer

Firms produce at the lowest possible cost.

Question 17

If the market demand for cage-free eggs decreases, what is the likely long-run effect on the number of firms in the industry?

Accepted Answer

The number of firms will decrease.

Question 18

Which formula correctly calculates average revenue (AR) for a perfectly competitive firm?

Accepted Answer

$$AR = \frac{TR}{Q}$$

Question 19

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

Accepted Answer

Price is less than average variable cost at all output levels.

Question 20

Which of the following best describes the invisible hand in a perfectly competitive market?

Accepted Answer

Individual actions by buyers and sellers lead to market equilibrium without centralized control.

Firms in Perfectly Competitive Markets: Structure, Profit Maximization, and Efficiency

Study Guide - Practice Questions

Study Guide - Flashcards