Question 1

For a perfectly competitive firm, what is the price elasticity of demand for the firm's product?

Accepted Answer

Perfectly elastic

Question 2

A competitive firm maximizes profit by producing the quantity where:

Accepted Answer

$$MR = MC$$

Question 3

If a competitive firm faces a market price below its average variable cost at all output levels, what should the firm do in the short run?

Accepted Answer

Shut down production

Question 4

Which of the following correctly describes the relationship between price, marginal revenue, and average revenue for a competitive firm?

Accepted Answer

$$P = MR = AR$$

Question 5

Suppose Jake’s Yumburger stall has total revenue of $$130,000 and explicit costs of 80$$,000. If Jake’s opportunity cost of his time is $40,000, what is his economic profit?

Accepted Answer

$$10,000$$

Question 6

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

Accepted Answer

$$P \geq AVC$$

Question 7

What does the area between the price line and the average variable cost curve, up to the profit-maximizing output, represent for a competitive firm?

Accepted Answer

Producer surplus (rent)

Question 8

If the market price is equal to the minimum of the average total cost curve, what is the firm’s profit?

Accepted Answer

Zero economic profit

Question 9

Which of the following is true about the supply curve of a competitive firm in the short run?

Accepted Answer

It is the portion of the marginal cost curve above the minimum AVC

Question 10

In the long-run equilibrium of a perfectly competitive market with identical firms and no sunk costs, which of the following must be true?

Accepted Answer

$$P = MC = minAC$$

Question 11

If a firm is earning zero economic profit in equilibrium, what does this imply about its accounting profit?

Accepted Answer

Accounting profit equals the opportunity cost of capital and labor

Question 12

Which of the following best explains why a competitive firm cannot make an economic profit in the long run?

Accepted Answer

Entry and exit of firms drive profit to zero

Question 13

Suppose the market price increases. What happens on the intensive and extensive margins in a market with heterogeneous firms?

Accepted Answer

Existing firms produce more (intensive), and new firms enter (extensive)

Question 14

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

Accepted Answer

Shut down immediately

Question 15

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

Accepted Answer

The firm can influence the market price

Question 16

In the context of the market supply curve, what does an 'extensive margin' adjustment refer to?

Accepted Answer

Entry or exit of firms in response to price changes

Question 17

If a firm’s rent is positive but profit is zero, what does this imply?

Accepted Answer

The firm covers all avoidable costs and earns a return on fixed factors

Question 18

Which of the following equations correctly represents marginal revenue for a competitive firm?

Accepted Answer

$$MR = \frac{\Delta TR}{\Delta Q}$$

Question 19

A wheat farmer in a perfectly competitive market faces a market price of $$5 per bushel. If the farmer’s marginal cost of producing the 100th bushel is 5$$, what should the farmer do?

Accepted Answer

Produce the 100th bushel

Question 20

In the short run, what is the difference between the shutdown point and the breakeven point for a competitive firm?

Accepted Answer

Shutdown point: $$P = minAVC$$; Breakeven point: $$P = minAC$$

The Competitive Firm and Market Supply Curves: Principles and Applications

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