Question

1. Firms is a perfectly competitive market are...

a. unaffected by costs

b. price setters

c. unaffected by price

d. price takers

2. What rule does a perfectly competitive firm use to determine its profit maximizing level of output?

a. MR = AFC

b. MR = TR

c. MC = ATC

d. MC = MR

3. Which is of the following is NOT an assumption of perfect competition?

a. no barriers to entry

b. homogeneous product

c. imperfect information

d. perfect information

4. In the long run , a perfectly competitive firm can expect...

a. zero economic profits

b. positive economic profits

c. many fixed inputs

d. negative economics profits

5. A perfectly competitive firm computes total revenue as

a. MC x MR

b. Price x Quantity

c. Price x MC

d. Price x Fixed Costs

6. A perfectly competitive firm should shut down when...

it cannot cover its total revenue

it cannot cover its total costs

it cannot cover its marginal revenue

it cannot cover its variable costs

7. A firm may enter a perfectly competitive market when...

it sees short run economic costs

it sees short run economic profits

the price is below the shutdown point

it sees short run economic losses

8. Perfectly competitive markets...

avoid marginal cost pricing

display allocation efficiency

use fixed cost pricing

display allocation inefficiency

9. Perfectly competitive firm Doggies Paradise Inc. sells winter coats for dogs. Dog coats sell for $62 each. The fixed costs of production are $150. The total variable costs are $64 for one unit, $84 for two units, $114 for three units, $184 for four units, and $270 for five units. What is the marginal cost of going from two units of output to three units of output?

10

20

30

40

10. Which of the following is true about demand in a perfectly competitive environment?

MC < Price

Price < MR

MR > MC

Price = MC

Answer 1

1.

d. price takers

Explanation :

Perfectly competitive firm produce homogeneous product and there are many firms in the market. There is free entry and exit. They charge price what market price is. So they are price takers. Because they have no market power they are price taker.

2.

d. MC = MR

Explanation:

Firm maximises it's profit where MR equals MC. Marginal revenue is the extra revenue generated by the firm with selling one more extra unit and marginal cost is the extra cost occurred with the production of one more extra unit. So when MR is greater than MC, extra unit will be profitable. And when MR is less than MC, that extra unit of production is not profitable. So firm will maximise its profit by producing where MR equals MC.

3.

c. imperfect information

Explanation :

In perfect competition, there is perfect information. There is free entry and exit. And they produce homogeneous product.

4.

a. zero economic profits.

Explanation :

Perfectly competitive firm earns zero economic profit in long run. When there is positive economic profit, new firm have incentive to enter the market. When there is negative profit, existing firm will exit the industry. At the end of this entry and exit process, firms will earn zero economic profit in long run.

5.

b. Price x Quantity

Explanation :. Total revenue is equals to price multiply by quantity produced.