ECO 201 SI Week 10: Profit maximization

For a perfectly competitive firm, marginal revenue: 

• is less than price.

• is greater than price.

• decreases as the firm increases output.

• is equal to price

The figure shows cost curves for a firm operating in a perfectly competitive market. If the market price is less than P2, the firm will ________ in the short run.

• produce q1 and break even

• produce q1 and incur a loss

• shut down

• produce q3 and make a profit

In the short run, a perfectly competitive firm produces output and earns an economic profit if: 

• P > ATC

• P = ATC

• P < AVC

• AVC > P > ATC

If the price a perfectly competitive firm is facing in the market is P2, then the profit-maximizing firm in the short run should produce output

• C

• D

• E

• F

The short-run shut down price for a perfectly competitive firm is 

• P1

• P2

• P3

• P4

If the market price is $2, the firm will:

• shut down and suffer a loss equal to fixed cost.

• produce 200 units and make a loss equal to its total fixed cost.

• continue operating in the short run and suffer a loss that is less than its fixed cost.

• shut down and make zero profit.

When we say that the firm is a price taker we mean essentially that

• the demand curve that the firm faces is perfectly inelastic.

• the firm can alter its rate of production and sales without affecting the market price of the product.

• the firm initially takes price as given and tries to influence it through advertising.

• the firm can alter the market price as it changes its rate of production.

Which of the following is not an assumption of a perfectly competitive market?

• All firms sell identical (homogeneous) products

• Firms can freely enter and exit the market

• Firms have significant influence over the market price

• Buyers and sellers have perfect information

Which assumption of perfect competition ensures that firms cannot earn long-term economic profit?

• Homogeneous products

• Many buyers and sellers

• Free entry and exit

• Perfect information

If a market is perfectly competitive, the only way firms can compete is by:

• Advertising

• Improving product quality

• Lowering prices

• Creating new goods