Perfect Competition Basics 2

What happens when demand and supply are equal in a perfect competitive market?

• Prices decrease rapidly

• Resources become scarce

• Government intervention increases

• Prices stabilize and optimal allocation of resources is achieved.

How is the price determined in a perfect competition market?

• Price is determined by government regulations.

• Price is determined by the cost of production.

• Price is determined by consumer preferences.

• Price is determined by the intersection of market demand and supply curves.

What is the main goal of profit maximization in perfect competition?

• Minimize total revenue

• Produce at the quantity where average cost equals average revenue

• Produce at the quantity where marginal cost equals marginal revenue

• Maximize fixed costs

Explain the concept of entry and exit in a perfect competition market.

• Entry and exit in a perfect competition market are related to the ease with which new firms can enter the market and existing firms can leave. In perfect competition, there are no barriers to entry or exit, allowing for free movement of firms in and out of the market based on profitability.

• Entry and exit in perfect competition are determined by consumer demand.

• Entry and exit in perfect competition are controlled by the government.

• In perfect competition, firms cannot leave the market once they enter.

Describe the long-run equilibrium in a perfect competition market.

• All firms make supernormal profits

• New firms can easily enter and exit the market

• Price is higher than marginal cost

• All firms earn normal profits, no incentive for new firms to enter or exit, price equals marginal cost.

In a perfect competition market, what happens if a firm is making economic losses in the short run?

• The firm will increase production to lower average costs

• The firm will continue to operate in the short run as long as it can cover its variable costs, but may exit the market in the long run if losses persist.

• The firm will receive government subsidies to cover losses

• The firm will shut down immediately to avoid further losses

What is the role of barriers to entry in perfect competition?

• Barriers to entry do not exist in perfect competition.

• Barriers to entry are essential for perfect competition.

• Barriers to entry create monopolies in perfect competition.

• Barriers to entry are determined by the government in perfect competition.

What are the key characteristics of a perfectly competitive market?

• Limited number of buyers and sellers

• Diverse range of products

• Large number of buyers and sellers, homogenous products, perfect information, ease of entry and exit, no market power for individual firms

• Imperfect information

What is the impact of a decrease in production costs on firms in a perfect competition market?

• Firms will increase prices to maximize profits

• Firms will reduce prices to attract more customers

• Firms will maintain the same prices to stabilize the market

• Firms will exit the market due to increased competition

Explain the concept of allocative efficiency in a perfectly competitive market.

• Allocative efficiency occurs when firms produce at the lowest possible cost

• Allocative efficiency is achieved when resources are allocated to their most valued uses

• Allocative efficiency means maximizing total revenue for the firm

• Allocative efficiency is not relevant in a perfectly competitive market