Question 1

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

Accepted Answer

Products are differentiated

Question 2

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

Accepted Answer

$$MC = MR$$

Question 3

Suppose the market price is greater than a firm's average total cost ($$P \u003e ATC). $$What will happen in the long run?

Accepted Answer

New firms will enter the market, increasing supply and lowering price

Question 4

If the market price falls below a firm's average variable cost ($$P \u003c AVC) in $$the short run, what should the firm do?

Accepted Answer

Shut down production temporarily

Question 5

In the short run, a perfectly competitive firm will continue to produce as long as:

Accepted Answer

$$P \geq AVC$$

Question 6

Which equation correctly represents profit for a single firm?

Accepted Answer

$$Profit = TR - TC$$

Question 7

If a perfectly competitive firm is operating at a loss in the short run but $$P \u003e AVC$$, what is the best course of action?

Accepted Answer

Continue producing to cover some fixed costs

Question 8

Market equilibrium in a perfectly competitive market occurs where:

Accepted Answer

Market supply equals market demand

Question 9

Suppose there is an increase in demand for garlic due to health benefits. In the short run, what happens to price and profit for garlic producers?

Accepted Answer

Price rises and firms earn positive economic profit

Question 10

In the long run, after an increase in demand in a perfectly competitive market, what is the expected outcome?

Accepted Answer

More firms enter, supply increases, and price returns to break-even level

Question 11

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

Accepted Answer

Shut down if $$P \u003c AVC$$

Question 12

If a firm is producing where $$P = ATC in $$the long run, what is the firm's economic profit?

Accepted Answer

Zero

Question 13

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

Accepted Answer

Resources are allocated such that $$P = MC$$

Question 14

A perfectly competitive firm faces a market price of $$P = 10. $$Its marginal cost curve is $$MC = 2 + Q. $$What is the profit-maximizing output?

Accepted Answer

$$Q = 8$$

Question 15

If the average total cost curve is above the market price at all output levels, what should a firm do in the long run?

Accepted Answer

Exit the market

Question 16

Which of the following best explains why firms in perfect competition earn zero economic profit in the long run?

Accepted Answer

Free entry and exit drive profits to zero

Question 17

If a firm’s total revenue is $$TR = 1000$$ and total cost is $$TC = 1200$$, what is its profit?

Accepted Answer

$$-200$$

Question 18

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

Accepted Answer

Wheat farming

Question 19

If the market price is equal to a firm's minimum average total cost, what is true about the firm's profit?

Accepted Answer

The firm earns zero economic profit

Question 20

In the short run, if a firm’s marginal cost is below the market price, what should the firm do?

Accepted Answer

Increase output

Perfect Competition: Output, Price, and Profit in the Short and Long Run

Study Guide - Practice Questions