Question

1. Suppose a perfectly Competitive firms minimum average variable cost is $1 when it produces 50. If the price is $2 and the firm's marginal cost is $2 the firm should
2. Continue to produce, but produce less than 50
3. Continue to operate, but produce more than 50
4. Shut down
5. Continue to produce 50

2. To maximize economic profit of perfectly competitive firm:
3. will sell its goods below the market price
4. all of the above
5. will sell its goods above the market price
6. will sell its good at the market price

3. when a firm shuts down it incurs a loss equal to
4. it's total fixed cost
5. it's total cost
6. it's average fixed cost
7. it's total variable cost

4. A perfectly competitive industry:
5. has many buyers and many sellers
6. has one firm that sets the price for the others to follow
7. has many sellers but there might be only one or two buyers
8. has many buyers but there might be only one or two sellers

5. Assume a profit maximizing firms short run cost is TC = 1200 + 7Q^2. If its demand curve is P=60-Q, what is the profit maximizing quantity.
6. 4
7. 14
8. 1200
9. 15

Answer 1

1) Answer is D. Firm should continue production of 50 because firm is able to cover its variable costs.

2) Answer is D. Will sell its good at market price. In perfect competition all firms are price takers and they can not charge different price, they have to charge the price which is prevailing in the market.

3) Answer is A. Total fixed cost. Because variable cost changes as output changes, but even when output is zero fixed costs remains same. So firms have to incur the fixed costs.

4) Answer is A. In perfect competition there are many sellers and many buyers in the industry. No single firm have any control on the market price. Market price is decided by the market demand and market supply.

5) Answer is D. 15

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