Question 1

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

Accepted Answer

There are barriers to entry and exit in the market.

Question 2

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

Accepted Answer

$MR = MC$

Question 3

If the market price falls below a firm's average variable cost, what should the firm do in the short run?

Accepted Answer

Shut down production.

Question 4

Which of the following best describes the law of diminishing returns?

Accepted Answer

After a certain point, each additional worker contributes less output than the previous worker.

Question 5

A bakery faces the following costs: fixed cost = $100$, variable cost = $200$, and it produces $50$ loaves of bread. What is the average total cost (ATC) per loaf?

Accepted Answer

$ATC = \frac{100 + 200}{50} = 6$

Question 6

Which of the following is an example of an implicit cost for a business owner?

Accepted Answer

The salary the owner could have earned working elsewhere.

Question 7

If a firm’s total revenue is $5000$, explicit costs are $3000$, and implicit costs are $1000$, what is the firm’s economic profit?

Accepted Answer

$Economic\ profit = 5000 - (3000 + 1000) = 1000$

Question 8

Which of the following would increase the price elasticity of supply for a product?

Accepted Answer

The more easily the firm can hire workers.

Question 9

A firm’s marginal cost (MC) of producing the 101st unit is $10$, and the market price is $10$. What should the firm do to maximize profit?

Accepted Answer

Produce the 101st unit, since $MC = MR = P$ at profit maximization.

Question 10

Which of the following best describes producer surplus?

Accepted Answer

The difference between the price the firm would be willing to accept and the market price.

Question 11

If the price of a good increases by 10% and the quantity supplied increases by 20%, what is the price elasticity of supply?

Accepted Answer

$Elasticity = \frac{20\%}{10\%} = 2$

Question 12

Which of the following is true about firms in a perfectly competitive market in the long run?

Accepted Answer

Firms earn zero economic profit.

Question 13

A firm’s total cost is $400$ when producing $20$ units. If the fixed cost is $100$, what is the average variable cost (AVC)?

Accepted Answer

$AVC = \frac{400 - 100}{20} = 15$

Question 14

Which of the following best explains why no individual buyer or seller can influence the market price in perfect competition?

Accepted Answer

There are so many buyers and sellers that each one’s impact is negligible.

Question 15

If a firm’s total revenue is $2000$ and it sells $100$ units, what is the price per unit?

Accepted Answer

$Price = \frac{2000}{100} = 20$

Question 16

Which of the following is a real-world example of a market that closely resembles perfect competition?

Accepted Answer

Wheat farming.

Question 17

A firm’s average fixed cost (AFC) is $5$ and it produces $10$ units. What is the total fixed cost?

Accepted Answer

$Total\ fixed\ cost = AFC 	imes quantity = 5 	imes 10 = 50$

Question 18

If a firm’s marginal cost of producing the 10th unit is $8$ and the marginal revenue is $10$, what should the firm do?

Accepted Answer

Increase output, since $MR > MC$.

Question 19

Which of the following best describes the shutdown rule for a perfectly competitive firm in the short run?

Accepted Answer

Shut down if price is less than average variable cost.

Perfect Competition and Cost Structures in Microeconomics

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