Question

1. In both perfect competition and monopolistic competition, in the long run typical firms earn zero economic profit. Which of the market characteristics is most responsible for this zero economic profit?

There are many buyers and sellers in these markets.

There is no government control of price in these market.

Identical (homogeneous) products are sold in these markets.

Differentiated products are sold in these markets.

There are no significant barriers to entry to these markets.

2.

If a firm in a perfectly competitive market shuts down in the short run, it will

have total revenue greater than its fixed costs.

have to do this because the price is more than the AVC.

lose money equal to its total fixed costs.

have no losses.

still be following the MC=MR rule.

3. Which of the following is true of the cost of production under the rule of “ceteris paribus?”

I.a firm produces goods by combining land, labor, natural resources and entrepreneurship.
II. In the short run at least one factor of production is fixed.
III. When one factor of production is fixed, the firm will experience marginal diminishing returns.
IV. With good management, all costs of production can be controlled and the firm will always experience long run profits.

IV only

I only

II and III

II and IV

I, II and IV

I, II and III

4. The widget industry has the following characteristics: over 600 producers with no one producer furnishing more than 0.5% of the industry’s total output; widgets produced by different firms are identical and there are no brands or labels on the product; there are no significant barriers to entry to the widget market; there is no economic profit in the long run. The widget market is best described as what type of market?

Perfect competition

Monopolistic competition

Differentiated oligopoly

Undifferentiated oligopoly

Pure monopoly

A perfect competitive firm has marginal revenue of $45 per unit. Which of the following is true if the firm can produce 650 units for a total cost of $2585, 651 units for a cost of $2630 and 652 units for a cost of 2685?

the firm should produce at 650 units

the firm should produce at 651 units

the firm should produce at 652 unit

s the firm should shut down because its losing money at any unit

the firm should increase its price at 651 units

Answer 1

Ans.1- There are no significant barriers to entry to these markets.

If firms are making supernormal profits in the short run then new firms will enter the market until profits become 0. If firms are making losses then some of them will exit making profits again equal to 0.

Ans.2- lose money equal to its total fixed costs.

When firms shuts down its output = 0 and total cost = total fixed cost.

So, profits = TR-TC = 0 - TFC = -TFC

Ans.3- I,II and III

The only wrong statement is statement number 4.

Ans.4- Perfect competition

It is perfect competition because there are many firms in the market each producing an identical product. Note that its not the case of monopolistic competition because firms are not producing differentiated products here.