Perfect Competition and Profit Maximization Quiz

Suppose that the paper clip industry is perfectly competitive. Also assume that the market price for paper clips is 2 cents per paper clip. The demand curve faced by each firm in the industry is:

• A horizontal line at 2 cents per paper clip.

• A vertical line at 2 cents per paper clip.

• The same as the market demand curve for paper clips.

• Always higher than the firm’s MC curve.

What can you conclude about the structure of the industry in which this firm is operating? 

• monopoly

• perfectly competitive

• monopolistic competitive

• oligopoly

Why do the demand and marginal-revenue curves coincide?

• Because MC<MR for any unit below demand

• Because the sellers marginally demand that much

• TR<TC

• The firm can sell as many units as it wants. When you sell the next unit for $2, your TR increases by $2.

A perfectly competitive firm whose goal is to maximize profit will choose to produce the amount of output at which:

• TR and TC are equal.

• TR exceeds TC by as much as possible.

• TC exceeds TR by as much as possible.

• none of the above.

If it is possible for a perfectly competitive firm to do better financially by producing rather than shutting down, then it should produce the amount of output at which:

• MR < MC.

• MR = MC.

• MR > MC.

• none of the above.

A perfectly competitive firm that makes car batteries has a fixed cost of $10,000 per month. The market price at which it can sell its output is $100 per battery. The firm’s minimum AVC is $105 per battery. The firm is currently producing 500 batteries a month (the output level at which MR = MC). This firm is making a _________ and should ______________ production.

• profit; increase

• profit; shut down

• loss; increase

• loss; shut down

Consider a profit-maximizing firm in a competitive industry. For each of the following situations, indicate whether the firm should shut down production or produce where MR = MC.

P < minimum AVC.

• Shut down

• Produce (long-run)

• Produce (loss minimize)

Consider a profit-maximizing firm in a competitive industry. For each of the following situations, indicate whether the firm should shut down production or produce where MR = MC.

P > minimum ATC.

• Shut down

• Produce (long run)

• Produce (loss-minimize)

Consider a profit-maximizing firm in a competitive industry. For each of the following situations, indicate whether the firm should shut down production or produce where MR = MC.

Minimum AVC < P < minimum ATC.

• Shut down

• Produce (long run)

• Produce (loss minimize)

At a product price of $56, will this firm produce in the short run?

• Yes

• No