Q: Why did the price of butter begin rising steadily after an initial drop, even though demand had not changed?

Firms exited the market, reducing supply.

Q: In an increasing cost industry, what happens to the long-run equilibrium price after an increase in demand?

It rises above the original price.

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

Firms can set prices above market equilibrium.

Q: If a firm is indifferent between operating and shutting down in the short run, what is true about the price?

Price equals minimum average variable cost.

Question 1

Which of the following best describes a perfectly competitive market?

Accepted Answer

A market with many buyers and sellers trading identical products, where each buyer and seller is a price taker.

Question 2

In a perfectly competitive market, what is the relationship between marginal revenue and price?

Accepted Answer

Marginal revenue is equal to price.

Question 3

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

Accepted Answer

$MR = MC$

Question 4

If the market price falls below the minimum average variable cost, what should a perfectly competitive firm do in the short run?

Accepted Answer

Shut down production.

Question 5

Economic profit is defined as:

Accepted Answer

$Economic\ Profit = Total\ Revenue - Economic\ Cost$

Question 6

In the long run, what happens to economic profit in a perfectly competitive market?

Accepted Answer

Firms earn zero economic profit.

Question 7

Suppose the demand for milk increases in Manhattan. In the short run, what is the likely effect on price and profit for milk producers?

Accepted Answer

Price increases and profit becomes positive.

Question 8

In the long run, after an increase in demand in a constant cost industry, what happens to the price and number of firms?

Accepted Answer

Price returns to its original level and the number of firms increases.

Question 9

Which of the following is true about the long-run market supply curve in an increasing cost industry?

Accepted Answer

It is positively sloped.

Question 10

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

Accepted Answer

Shut down production.

Question 11

In the long run, what is the effect of positive economic profit in a perfectly competitive market?

Accepted Answer

More firms enter the market.

Question 12

Which rule determines whether a firm should shut down in the short run?

Accepted Answer

If $P < AVC_{min}$, shut down.

Question 13

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

Accepted Answer

Firms will exit the industry.

Question 14

If the ice cream stand industry faces an increase in demand during the summer and inputs are in plentiful supply, what will the long-run supply curve look like?

Accepted Answer

Horizontal.

Question 15

Why did the price of butter begin rising steadily after an initial drop, even though demand had not changed?

Accepted Answer

Firms exited the market, reducing supply.

Question 16

Which equation represents the profit maximization rule for a perfectly competitive firm?

Accepted Answer

$P = MC$

Question 17

In an increasing cost industry, what happens to the long-run equilibrium price after an increase in demand?

Accepted Answer

It rises above the original price.

Question 18

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

Accepted Answer

Firms can set prices above market equilibrium.

Question 19

If a firm is indifferent between operating and shutting down in the short run, what is true about the price?

Accepted Answer

Price equals minimum average variable cost.

Question 20

Which of the following best explains why firms in a perfectly competitive market earn zero economic profit in the long run?

Accepted Answer

Entry and exit of firms drive profits to zero.

CHAPTER 9: Perfect Competition: Theory, Firm Behavior, and Market Dynamics

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