Question

A perfectly competitive market does not imply which of the following?

a.	The market price is established at the point where supply equals demand.	b.	Marginal benefit equals marginal cost.
c.	The firm’s price will be greater than marginal revenue.	d.	Production is carried out only until supply equals demand.

Which of the following is not a point where firms produce in long-run equilibrium?

a.	Marginal cost equals marginal revenue.	b.	Price is greater than marginal cost.
c.	The minimum average variable cost is below selling price.	d.	The minimum long-run average costs are equal to the selling price.

A decrease in demand will not cause firms to do which of the following if they operate where marginal cost is equal to average total cost which is also equal to long-run average cost in long-run equilibrium?

a.	Increase capital investment	b.	Produce efficiently
c.	Shift supply to the left	d.	Reduce output

Firms will not do which of the following under perfect competition?

a.	Be driven to produce at the lowest possible short-run average cost	b.	Produce at a point where marginal cost is greater than marginal revenue
c.	Select the most efficient plant size	d.	Minimize average cost in the long run

Answer 1

Ans 1. Option c

In a perfectly competitive market, equilibrium occurs where marginal revenue is equal to the marginal cost and due to perfectly elastic demand, the price equals the marginal revenue.

Ans 2. Option b

In a perfectly competitive market, the equilibrium occurs at the point where marginal revenue equals marginal cost and as the firms face perfectly elastic demand, so, price equals the marginal revenue and thus, marginal cost.

Ans 3. Option a

When demand decreases, the price of the good falls and firms start to incur losses due to which many of them exit the market decreasing the supply and thus, production at equilibrium and not increasing capital investment.

Ans. Option b

In perfect competition, firms can maximise profit only at the level where marginal cost equals marginal revenue. So, if a firm tries to produce at point where marginal cost is greater than marginal revenue, it will start to incur losses.

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