Topic 6 - Chapter 8: Profit Maximization and Competitive Supply

Which of the following is NOT an assumption of perfect competition?

• A. Price taking

• B. Product homogeneity

• C. Free entry and exit

• D. Product differentiation

A perfectly competitive firm is called a price taker because:

• It can influence market demand

• Its output is too small to affect market price

• It sets price equal to average cost

• Government determines its price

In a perfectly competitive market, the demand curve faced by an individual firm is:

• Downward sloping

• Vertical

• Upward sloping

• Perfectly elastic (horizontal)

For a competitive firm, marginal revenue (MR) is equal to:

• Average total cost

• Marginal cost

• Price

• Fixed cost

Which statement is TRUE regarding product homogeneity?

• Products are heavily differentiated

• Firms can charge any price

• Products are perfectly substitutable

• Consumers are loyal to brands

A firm should continue operating in the short run as long as:

• Price > ATC

• Price > AVC

• Price > AFC

• MR > ATC

If market price falls below average variable cost (AVC), a competitive firm should:

• Increase output

• Continue production

• Shut down in the short run

• Raise price

The short-run supply curve of a competitive firm is:

• The entire AVC curve

• The entire MC curve

• The ATC curve above AVC

• The MC curve above AVC

Producer surplus for a firm is:

• Total revenue minus fixed cost

• Profit plus fixed cost

• The area above MC and below market price

• Equal to total profit

Economic profit differs from accounting profit because economic profit includes:

• A. Taxes

• B. Depreciation

• C. Explicit costs only

• D. Opportunity costs