Question

Part III: Multiple Choice 20. Which of the following statements is not a characteristic of a perfectly competitive firm? a. Perfectly competitive firms view each other as fierce rivals. b. Firms are price-takers. c. All firms produce a homogeneous product. d. Perfectly competitive markets allow freedom of entry and exit. 21. Since the firm's demand curve is perfectly elastie for a price-taking firm, a. P-MR. b. P-MRP. c. P-TR d. both a and b. e. both a and c 22. In the short run, a firm shuts down when a. profit is negative. b. TR < TVC c. MRP> ARP at the level of labor usage where MRP w d. both b and c. e. all of the above. 23. In the short run, a firm continues to produce at a loss when a. TR2 TFC b. P2 AFC. c. (TR/Q) 2 (ATC- AFC). d. both b and c. e. both a and c 24. In a competitive industry the market price of output is $24. A firm is producing that level of output at which average total cost is $30, marginal cost is $25, and average fixed cost is $5. In order to maximize profit (or minimize losses), the firm should a increase output. b. decrease output but keep producing. c. leave output unchanged. d. shut down. 25. In long-run competitive equilibrium, a. economic profit is zero. b. P-LMC. c. P-LAC d. P-SMC e. all of the above

Answer 1

Answer 20

A. Perfectly competitive firms view each other as fierce rivals.

Explanation

Perfectly competitive market has fre entry and exit, and also they sells the homogeneous product. Firms are price taker as buyers and sellers must accept the price determine by the market.

Question 21

A. P=MR.

Explanation

For competitive firm price is equals to Marginal revenue. Becouse they are price taker. They sell at one price. So if we sell one extra unit the revenue will increase as that unit only.

Marginal revenue means revenue generated by the firm with the selling of extra unit, and here the price is same for any quantity so selling extra unit will become marginal revenue and that must be equals to price.

Example :

Suppose price is $5.

Now quantity is 1, 2, 3.

Total revenue=p*q

For quantity 1=1*5=5

Quantity 2=2*5=10

Quantity 3=3.5=15

Now marginal revenue =change in total revenue /change in quantity

Quantity 2= 10-5/2-1 =5.

Quantity 3=15-10/3-2=5.

Question 22

B. TR<VC

Explanation :

TR stabds for total revenue.

VC stands for variable cost.

Variable cost means the cost which vary with the unit of production. So if production is zero then variable cost also becomes zero.

Now if the firm is earning less than the variable cost it means firm is doing loss but if we stop the production for the short run we can save the variable cost. So when total revenue become less than the variable cost firm should stop production in short run.

Question 23

C. (TR/Q) >= (ATC-AFC)

Explanation

Here in the short run firm will continue to produce if the TR or Price will be equal to or greater than the AVC and less than ATC. But will exit in long run.

TR=p*q

So TR/Q=P.

And,

AVC= ATC-AFC.