Question 1

It is possible for firms in a competitive market to earn positive accounting profits in the long-run.

Accepted Answer

In a competitive market, firms are forced to minimize costs and improve efficiency in order to stay competitive. This can lead to positive accounting profits in the long-run, as long as the firms are able to maintain their competitive advantage. However, in the long-run, there will be no economic profits as competitors will enter the market and reduce profits to zero.

Question 2

A firm will shut down in the short run if revenue is not sufficient to cover its variable costs of production.

Accepted Answer

This is the definition of a firm's shutdown point in the short run. If revenue cannot cover variable costs, the firm cannot continue to operate without incurring losses.

Question 3

In making a short-run profit-maximising production decision, the firm must consider both fixed and variable cost.

Accepted Answer

False

Question 4

A firm will exit in the short run if total revenue is less than total costs.

Accepted Answer

In the short run, a firm will continue to operate if total revenue covers variable costs, even if it does not cover total costs, as fixed costs are sunk in the short run.

Question 5

A firm's incentive to compare marginal revenue and marginal cost is an application of the principle that rational people think at the margin.

Accepted Answer

Rational individuals compare the costs and benefits of each decision at the margin, where "margin" refers to the benefits and costs of the next increment of an activity. Firms, too, need to compare the marginal revenue and the marginal cost in order to determine the optimal level of output that will maximize profits.

Question 6

It is not possible for the marginal firm in a competitive market to make an economic profit in the long-run.

Accepted Answer

This is because if the marginal firm is making an economic profit, it will attract new firms to enter the market, which will increase supply and reduce the price until the economic profit disappears. Thus, in the long run, the marginal firm will only earn a normal profit, which covers its opportunity cost of production.

Question 7

One of the important characteristics of a perfectly competitive market is that there are many buyers and sellers.

Accepted Answer

In a perfectly competitive market, there are many buyers and sellers, each of whom is a price taker and has no market power to influence prices. This ensures a level playing field and competition among the market participants.

Question 8

For a firm in a competitive market, marginal revenue is always equal to average revenue.

Accepted Answer

In a competitive market, the firm is a price taker and must accept the market price. Therefore, the marginal revenue earned by the firm from selling one more unit is equal to the market price. Since the market price is also the average revenue earned by the firm, marginal revenue is always equal to average revenue in a competitive market.

Question 9

A profit-maximising firm in a competitive market will not increase production when average revenue exceeds marginal cost.

Accepted Answer

A profit-maximizing firm in a competitive market will continue increasing production as long as the marginal cost is less than or equal to the price (which is equal to the marginal revenue) because this will lead to an increase in profits. Therefore, the statement that the firm will not increase production when average revenue exceeds marginal cost is false.

Question 10

A firm in a competitive market will maximise profit when the level of production is such that marginal cost equals price.

Accepted Answer

This is the condition of profit maximization in a competitive market, where the firm should produce at the point where marginal cost (MC) equals price (P), i.e. MC = P. At this point, the firm is selling its output at the highest possible price that the market will bear, and any deviation from this level of output will lead to a decrease in the firm's profit.

Question 11

When individual firms in competitive markets increase their production, it is likely that market price will fall.

Accepted Answer

The answer of When individual firms in competitive markets increase...

Question 12

A firm must be participating in a competitive market in order for average revenue to equal price.

Accepted Answer

The answer of A firm must be participating in a...

Question 13

To answer the question 'How much revenue does the farm receive for the typical gallon of milk'?, a dairy farmer must be able to calculate sunk cost.

Accepted Answer

To answer the question about revenue from a gallon of milk, a farmer would need to know the selling price of the milk and the cost of production, but it does not necessarily require knowledge of sunk costs. Sunk costs are expenses that have already been incurred and cannot be recovered, such as the cost of purchasing equipment or land. While knowing sunk costs may be helpful for overall financial planning and decision-making, it is not directly relevant to determining the revenue from a gallon of milk.

Question 14

The supply curve of a firm in a competitive market is equal to average variable cost, above the minimum of marginal cost.

Accepted Answer

The supply curve of a firm in a competitive market is equal to the marginal cost curve above the minimum of average variable cost.

Question 15

The average total cost becomes downward sloping when it is crossed by the marginal cost curve.

Accepted Answer

The answer of The average total cost becomes downward sloping...

Question 16

If a firm is able to influence the market price of the good it sells, it has market power.

Accepted Answer

Market power refers to the ability of a firm to influence the market price of the good or service it sells, which means that it has some degree of control over the market. If a firm is not able to influence the market price, it is said to be a price taker and does not have market power. Therefore, option A is correct.

Question 17

The long-run equilibrium in a competitive market characterised by firms with identical costs is generally characterised by firms operating at efficient scale.

Accepted Answer

In a competitive market with identical costs, firms will operate at the minimum efficient scale (MES) in the long run, which is the scale at which they can produce output at the lowest possible average cost. This results in efficient production and allocative efficiency.

Question 18

By comparing the marginal revenue and marginal cost from each unit produced, a firm in a competitive market can determine the profit-maximising level of production.

Accepted Answer

In a competitive market, a firm will produce at the level where marginal revenue equals marginal cost, as this is where profit is maximized.

Question 19

Firms in competitive markets are said to be price takers.

Accepted Answer

In a competitive market, firms are small relative to the market and cannot influence the price of the product. They have to accept the market price as given and adjust their output accordingly. Therefore, they are considered price takers.

Question 20

In a competitive market, firms that increase prices experience increases in sales.

Accepted Answer

In a competitive market, firms that increase prices usually experience a decrease in sales as customers switch to cheaper alternatives offered by competitors.

Quiz 14: Firms in Competitive Markets