Question 1

The break-even price for a perfectly competitive firm is equal to:

Accepted Answer

The break-even price for a perfectly competitive firm is the price at which total revenue equals total cost, meaning the firm covers all its costs, including both fixed and variable costs. This occurs at the minimum value of average total cost.

Question 2

During the summer, Alex runs a mowing service, and lawn mowing is a perfectly competitive industry. In the short run, Alex will shut down if:

Accepted Answer

In the short run, a firm in a perfectly competitive market will shut down if the total revenues can't cover the variable costs, as it cannot cover the costs of production. Fixed costs are sunk in the short run and do not affect the shutdown decision.

Question 3

If the price is consistently below average total cost, then in the short run a perfectly competitive firm should:

Accepted Answer

The answer of If the price is consistently below average...

Question 4

The lowest point on a perfectly competitive firm's short-run supply curve corresponds to the minimum point on the _____ curve.

Accepted Answer

The lowest point on a perfectly competitive firm's short-run supply curve corresponds to the minimum point on the Average Variable Cost (AVC) curve, as this is the shutdown point where the firm covers its variable costs.

Question 5

Which of the following is TRUE?

Accepted Answer

In the short run, a firm will shut down if the price falls below the average variable cost because it cannot cover its variable costs.

Question 6

The short-run supply curve for a perfectly competitive firm is the ____ cost curve above the _____ price.

Accepted Answer

In the short-run, a perfectly competitive firm will produce as long as the price is greater than or equal to their marginal cost of production. If the price is below the average variable cost, the firm will shut down production. Therefore, the short-run supply curve for a perfectly competitive firm is the marginal cost curve above the shut-down price.

Question 7

Consider a perfectly competitive firm in the short run. Assume that it is sustaining economic losses but continues to produce at the profit-maximizing (loss-minimizing) output. Which statement is FALSE?

Accepted Answer

In the short run, a firm only needs to cover its variable costs to continue production. Thus, the firm will continue to produce as long as price is greater than or equal to average variable cost. Therefore, marginal cost must be equal to or greater than average variable cost, making statement D false. Statements A, B, and C are all true in the short run for a perfectly competitive firm.

Question 8

Many furniture stores run "going out of business" sales but never go out of business. For the shut-down decision to be the appropriate one, the price of furniture must be _____ than the _____ average variable cost.

Accepted Answer

For a business to shut down, the price must be lower than the minimum average variable cost, meaning the business cannot cover its variable costs and should cease operations.

Question 9

Zoe's Bakery determines that P < ATC and P > AVC. In the short run, Zoe should:

Accepted Answer

In the short run, if the price (P) is greater than the average variable cost (AVC) but less than the average total cost (ATC), Zoe should continue to operate to cover her variable costs and some of her fixed costs, even though she is taking an economic loss. Shutting down would mean she incurs a loss equal to her fixed costs.

Question 10

A perfectly competitive firm will incur an economic loss but will continue to produce a positive quantity of output in the short run if the price is:

Accepted Answer

A perfectly competitive firm will continue to produce in the short run as long as the price covers its average variable costs, even if it doesn't cover the average total costs, because it can still cover some of its fixed costs.

Question 11

The short-run shut-down price is:

Accepted Answer

The answer of The short-run shut-down price is:
...

Question 12

If the price is greater than the average variable cost and less than the average total cost at the profit-maximizing quantity of output in the short run, a perfectly competitive firm will:

Accepted Answer

When the price is greater than the average variable cost but less than the average total cost, a perfectly competitive firm will continue to produce in the short run to cover its variable costs and some of its fixed costs, even though it is incurring an economic loss. This is because shutting down would result in a greater loss, equal to the total fixed costs.

Question 13

Suppose Sarah's pottery studio is charging the market price, which is just higher than her minimum average total cost. This means that Sarah:

Accepted Answer

Sarah is charging a price higher than her minimum average total cost, which means she is covering all her costs and earning a small economic profit.

Question 14

Mikail's perfectly competitive camera memory card-producing factory is making positive economic profits. If the price of memory cards is $9, if Mikail's output is 3,000 cards a month, and if his monthly average total cost is $7, what are his monthly profits?

Accepted Answer

Mikail's monthly profits can be calculated by multiplying the difference between the price and the average total cost by the quantity sold: ($9 - $7) * 3,000 = $6,000.

Question 15

A perfectly competitive firm will continue producing in the short run as long as it can cover its _____ cost.

Accepted Answer

In the short run, a firm can't adjust its fixed costs, so it will continue producing as long as its revenue covers its variable costs. Therefore, the correct answer is C, variable cost.

Question 16

If the price is consistently below the average variable cost, then in the short run a perfectly competitive firm should:

Accepted Answer

If the price is consistently below the average variable cost, the firm is not even covering its variable costs, let alone its fixed costs. As a result, the firm is making a loss on each unit of output it produces. In this situation, it is best for the firm to shut down in the short run to minimize its losses. By shutting down, the firm will not have to pay its variable costs and can avoid making further losses.

Question 17

A perfectly competitive small organic farm produces 1,000 cauliflower heads in the short run. Its ATC = $6 and AFC = $2. The market price is $3 per head and is equal to MC. To maximize profits or minimize losses, this farm should:

Accepted Answer

The farm should shut down because the market price ($3) is less than the average variable cost (AVC = ATC - AFC = $6 - $2 = $4), meaning the farm cannot cover its variable costs and will incur losses by continuing production.

Question 18

A perfectly competitive firm is definitely earning an economic profit when:

Accepted Answer

In perfect competition, the market price (P) is equal to the marginal cost (MC) of the firm. Therefore, if the market price (P) is greater than the average total cost (ATC), the firm is earning an economic profit. So, option B is correct. Option A cannot be correct as MR > MC only indicates that the firm should increase output to maximize profit, but it does not necessarily mean the firm is earning a profit. Option C cannot be correct as P = MC is necessary for profit maximization, but it does not guarantee a profit. Option D cannot be correct as P < ATC indicates that the firm is making a loss.

Question 19

For a perfectly competitive firm, the short-run supply curve is the:

Accepted Answer

In the short-run, a perfectly competitive firm's supply curve is determined by its marginal cost (MC) curve. However, the firm will only supply output as long as the price is greater than or equal to its average variable cost (AVC). The point where the MC curve intersects the AVC curve is the shut-down point, where the firm will produce zero output if the price falls below AVC. Therefore, the short-run supply curve for a perfectly competitive firm is the rising portion of the MC curve above the shut-down point.

Question 20

The short-run supply curve for a perfectly competitive firm is its:

Accepted Answer

The short-run supply curve for a perfectly competitive firm is its marginal cost curve above its average variable cost curve. This is because a firm will only supply output in the short run if the price (or marginal revenue, which equals price in perfect competition) covers its average variable costs.

Quiz 12: Perfect Competition and the Supply Curve