Question

1.

If the market price is greater than _______ cost, a perfectly competitive firm can earn economic profits in the short run.

		average variable
		marginal
		average fixed
		average total

2.

The ___________ cost curve is closely associated with the firm's short-run supply curve in perfect competition.

		marginal
		average fixed
		average variable
		average total

3.

Which of the following will not occur if demand falls in the competitive market?

		Less than normal profits are being earned during the adjustment to long-run equilibrium.
		Supply decreases.
		Firms leave the market.
		Firms enter the market.

Answer 1

Ans. Option d

Total Profit = Total Revenue - Total Cost

We know that, Total Revenue = Price*Quantity

So, Total Profit = Price*Quantity - Total Cost

Dividing the whole equation by Quantity, Q, gives,

Profit per unit = Price - Average Total Cost

When firm earns a positive economice profit, Profit per units > 0

=> Price - Average total Cost > 0

=> Price > Avarage Total Cost

Ans. Option a

The supply curve of a perfectly competitive firm is the upward sloping portion of the marginal cost above the minimum point of average variable cost in short run and average total cost in long run.

Ans. Option d

A fall in demand will lead to decrease in price in the market. This will lead to economic losses to the firms. So, in long run many firms will exit the industry which will decrease the supply of the good in the market increasing the price so that the firms earn a normal profit in long run.