Question

1. In pure competition:

a. there is no supply since firms in the long run earn zero economic profits

b. a firm's demand curve is represented by a vertical line

c. a firm is a price-taker since the products of every firm are identical and consumers know this information

d. none of the above

2. A firm in pure competition (and other industry structures) is expected to shut down (produce q = 0) in the short run when:

a. price is less than minimum average total cost

b. price is less than minimum marginal cost

c. price is less than minimum average variable cost

d. none of the above

3. If price exceeds average costs under pure competition, _________ firms will enter the industry, supply will ______________, and price will be driven _____________.

a. more; decrease; down

b. more; decrease; up

c. more; increase; down

d. more; increase; up

4. What is a characteristic of a monopoly market?

a. Monopolists are price makers and there are barriers to entry.

b. There are no close substitutes for their product.

c. If a monopoly profit maximizes, neither allocative nor productive efficiency is likely achieved.

d. All of the above.

Answer 1

(1) (c)

In pure competition, each firm is too small to affect market price, so firms are price takers. Their demand curves are horizontal at market price.

(2) (a)

When price is lower than minimum point of AVC, the firm cannot recover its variable costs with revenue and will shut down in short run.

(3) (c)

When Price > ATC, Profit > 0, which attracts entry of new firms, increasing market supply. It will shift market supply curve leftwards, lowering price.

(4) (d)

All options are correct.