Question

3.) Which characteristic of competitive markets is mainly responsible for ensuring that prices will be kept low? [Hint: Think about what happens in the long run when price is above the minimum of average total cost.]

many buyers

many sellers

homogeneous goods

easy entry into and exit from the market

diminishing marginal product

4.) If a perfectly competitive firm is maximizing profits in the short run, what do we know about their level of profits?

The profit must be positive.

The profit must be negative.

The profit equals zero.

The profit must be zero or positive.

The profit can be negative, zero, or positive.

8.) If the market price is greater than both a firm's marginal cost and average variable cost, what should the firm do?

decrease its production level

increase its production level

stop producing

reduce the price

increase the price

Answer 1

Ans 3)

Option C is correct

In perfectly competitive market all the goods produced are homogeneous therefore one good is easily replaced with cheaper substitute hence all the firm should charge same price and stable outcome of this behavior is to charge price such that Price=Average Total Cost and all the firms have same cost structure

Ans 4)

In short run if perfectly competitive firm trying to maximize the profits then it can be either positive , zero or negative.

If Price in the short run is higher than Average Total Cost then they would make positive profit, If Price=Average Total Cost then zero profit and negative profit otherwise

Hence option D is correct

Ans 8)

if Price level is higher than Marginal Cost then firm should keep on producing.. It should increase the production till Marginal Revenue equals to Marginal Cost

Hence option B is correct