question
Which of the following is one of the necessary conditions for perfect competition?
answer
Large number of firms (in a PC market a large number of firms produce an identical product)
question
In a PC market, firms set:
answer
quantities, but not prices (Since firms are price takers in a perfectly competitive market, their individual output decisions do not affect price and they only choose the quantity of output they wish to supply at the existing market price.)
question
The market demand curve for a product produced in a PC industry is normally:
answer
downward sloping (follows directly from the law of demand, which applies to the total demand for a product, not the demand faced by a single firm)
question
Marginal revenue is equal to:
answer
the change in total revenue associated with a change in quantity (this is how marginal rev is calculated, according to your textbook)
question
A PC firm's marginal revenue is:
answer
equal to the selling price ( since a PC firm faces a horizontal demand curve, the sale of another unit of output increase total revenue by the selling price)
question
As long as marginal cost is below marginal revenue, a PC firm should:
answer
increase production (since the revenue obtained from selling another unit of output exceeds the cost of producing that unit, it is profitable to increase product)
question
To maximize profits, a PC firm should produce where marginal cost equals:
answer
marginal revenue: (If marginal cost equals marginal revenue, a firm cannot increase its profits by increasing or decreasing output. It is maximizing profit.)
question
A perfectly competitive firm facing a price of $10 decides to produce 100 widgets. If its marginal cost of producing the last widget is $12 and it is seeking to maximize profit, the firm should:
answer
Produce fewer widgets (Since marginal cost exceeds price, the firm can save more by reducing costs than it will lose in revenue by reducing output.)
question
If a PC firm finds that price is less than average variable cost it should:
answer
shut down immediately (If price is less than average variable cost, a firm cannot even cover its variable costs and therefore has no incentive to operate.)
question
The existence of positive economic profits induces firms to:
answer
enter industry, which shifts the market supply curve to the right and decreases market price (When economic profits are positive, firms have an incentive to enter an industry. As they do, supply increases at every price level, causing prices to fall.)
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