Question

1.Tom produces commemorative t-shirts in a competitive market.  If Tom decides to decrease his output, this will

	a.	increase his revenue, since the output decrease leads to a higher market price.
	b.	​decrease his revenue, since the price does not rise sufficiently when output drops to offset the drop in Tom’s output.
	c.	​increase his revenue, since Tom’s competitors will also decrease their output, so that price rises to offset the drop in Tom’s output.
	d.	decrease his revenue, since his output has decreased and the price remains the same.

2. Exiting decisions are long-run decisions.

a.True

b.False

3. If a firm observes that the price of its product is above average variable cost, it would choose to continue to produce the good in the short run, even if that firm experiences economic losses.

a.True

b.False

4. In a perfectly competitive market there

	a.	one firm.
	b.	are a lot of firms.
	c.	three firms.
	d.	few firms

5. Which of the following is a characteristic of a competitive market?

	a.	Buyers and sellers are price takers.
	b.	There are many buyers but few sellers.
	c.	Many firms have market power because they own patents.
	d.	Firms sell differentiated products.

Answer 1

1. Tom produces commemorative t-shirts in a competitive market. If Tom decides to decrease his output, this will decrease his revenue, since his output has decreased and the price remains the same. Hence,option(D) is correct.

2. TRUE exiting decisions are long run decisions because in the long run , the firm can enter or exit the firm (as the number of firms in the short run are fixed and in the long run are variable).

3. TRUE if a firm observes that price of its product is above average variable cost , it would choose to continue to produce the good in the short run , even if that firm experiences economic losses because if the price is below average variable cost ,only then firm will shut down ,otherwise it will continue to produce.

4. In a perfectly competitive market there are are a lot of firms. Hence, option(B) is correct.

5. Buyers and sellers are price takers is a characteristic of a competitive market . Hence,option(A) is correct.