Question

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 elastic 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. TR ≥ TFC.

b. P ≥ AFC.

c. (TR/Q) ≥ (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

20. Option A

Explanation: No firm in such markets has much market power and there are a large number of buyers.

21. Option A

Explanation: In perfect competition, each unit of the product is sold in the prevailing market price and price equals the marginal revenue.

22. Option B

Explanation: When the total revenue is less than than the total variable cost, the firm fails to recover its fixed cost and it should shut down.

23. Option C. (TR/Q) ≥ (ATC – AFC).

Explanation: TR/Q = Price. ATC – AFC = AVC

The firm continues to produce as long as the price is above the average variable cost.