Q: Suppose a sweater firm in a perfectly competitive market faces a market price of $25 per sweater. If the firm sells 9 sweaters per day, what is its total revenue?

$$TR = P \times Q = 25 \times 9 = 225$$

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 perfect competition, why is each firm considered a price taker?

Accepted Answer

Because the firm's output is a perfect substitute for other firms, so it cannot influence the market price.

Question 3

Suppose a sweater firm in a perfectly competitive market faces a market price of $25 per sweater. If the firm sells 9 sweaters per day, what is its total revenue?

Accepted Answer

$$TR = P 	imes Q = 25 	imes 9 = 225$$

Question 4

A firm in perfect competition maximizes profit by producing the quantity at which:

Accepted Answer

$$MR = MC$$

Question 5

If a firm’s average variable cost (AVC) is $$17 at its minimum and the market price falls to 15$$, what should the firm do in the short run?

Accepted Answer

Shut down temporarily, as price is below minimum AVC.

Question 6

Which formula correctly expresses a firm’s economic loss in the short run?

Accepted Answer

$$Economic\ Loss = TFC + TVC - TR$$

Question 7

In the long run, what happens in a perfectly competitive market if firms are making positive economic profit?

Accepted Answer

New firms enter, increasing market supply and lowering the price until economic profit is zero.

Question 8

If the market price equals a firm’s average total cost (ATC) at the profit-maximizing output, what is the firm’s economic profit?

Accepted Answer

Zero economic profit (break-even)

Question 9

A technological advance lowers the marginal cost (MC) and average total cost (ATC) for some firms in a perfectly competitive market. What is the initial effect on these firms?

Accepted Answer

They make economic profit until other firms adopt the technology.

Question 10

Which of the following best describes the efficiency of resource allocation in long-run equilibrium under perfect competition?

Accepted Answer

Marginal social benefit equals marginal social cost, and total surplus is maximized.

Question 11

If market demand for sweaters decreases, what sequence of events occurs in a perfectly competitive market starting from long-run equilibrium?

Accepted Answer

Price falls, firms incur losses, some exit, supply decreases, price rises, and equilibrium is restored at zero economic profit.

Question 12

Which curve represents the supply decision of a perfectly competitive firm in the short run?

Accepted Answer

The portion of the marginal cost curve above minimum AVC.

Question 13

A firm’s shutdown point occurs when:

Accepted Answer

Price equals minimum average variable cost ($$P = min\ AVC).$$

Question 14

If a firm’s marginal revenue ($$MR) is $$greater than its marginal cost ($$MC$$), what should the firm do to maximize profit?

Accepted Answer

Increase output.

Question 15

Which of the following statements is TRUE about consumer and producer surplus in perfect competition?

Accepted Answer

Total surplus (consumer plus producer surplus) is maximized in long-run equilibrium.

Question 16

In a perfectly competitive market, what happens to old-technology firms when a new, lower-cost technology is adopted by some firms?

Accepted Answer

Old-technology firms incur losses and either exit or adopt the new technology.

Question 17

Which of the following best explains why perfect competition leads to efficient use of resources?

Accepted Answer

Because in equilibrium, marginal social benefit equals marginal social cost.

Question 18

If the market price is between minimum AVC and ATC, what is true about a firm’s short-run production decision?

Accepted Answer

The firm produces where $$P = MC$$, covers all variable costs and some fixed costs, but incurs a loss less than TFC.

Question 19

Which of the following is a real-world implication of perfect competition in the Canadian sweater market, as described in the study materials?

Accepted Answer

Firms produce at the lowest possible long-run average total cost, and consumers pay a price equal to that cost.

Perfect Competition: Microeconomics Chapter 11 Study Notes

Study Guide - Practice Questions

Study Guide - Flashcards