In the long-run, every firm breaks even.ġ0. In a competitive market, a firm could have a profit, a loss, or break even in the short-run. (D) Positive economic profit implies that firms in this industry enjoy an above-normal return. (C) New entrants will enter the market until firms are earning negative economic profit. (B) Long-run competitive equilibrium is achieved as all firms are maximizing profit. (A) The market price will soon fall, so firms should exit the industry immediately to avoid losing money. Are the following statements true or false? Assume that firms are earning positive economic profit in a competitive market. The profit-maximizing condition in the short-run is: MR = MC and the MC curve is rising. When a competitive firm produces the profit-maximizing output in the short-run, which of the following statements must be true? (D) The market price is determined where the market supply curve intersects the market demand curve.Īt the long-run competitive equilibrium, every firm breaks even. (C) All firms in the industry are maximizing their profits. (B) At the profit-maximizing output level, the price of the product is less than the average variable cost of production. (A) No firm has an incentive to enter or exit the industry because every incumbent firm is earning zero economic profit. Which of the following is NOT true at the long-run competitive equilibrium? P = AC, so James breaks even and has zero economic profit.ħ. P > AVC, so James should continue to operate. (D) Need more information to answer this question. (C) Continue to operate in the short-run. (B) Increase the price to $5 per hot dog. James’ cost for ingredients is $2.5 a hot dog, while the cost of his city permit to operate on the street averages $1.5 a hot dog. James owns a competitive hot dog stand in downtown Toronto. (E) elastic and equal to the marginal cost curve.Ħ. (D) perfectly inelastic and equal to the marginal cost curve. (C) perfectly elastic and equal to the marginal cost curve. (B) perfectly elastic and equal to the marginal revenue curve. (A) perfectly inelastic and equal to the marginal revenue curve. The demand curve facing an individual competitive firm is: Which of the following is not a basic assumption of a perfectly competitive market?ĥ. In a competitive market, an individual firm is a price taker, and it faces a demand that is perfectly elastic (i.e., horizontal).Ĥ. A firm in a perfectly competitive market will have a marginal revenue curve that is _. Since P = 20 > 10, Firm A will continue to operate and will produce 50 units of product.ģ. (E) Q* = 50 Firm A should continue to produce. (C) Q* = 50 Firm A is indifferent about shutting down or producing. (B) Q* = 20 Firm A should continue to produce. What is Firm A’s profit-maximizing output decision for the short-run? Its short-run total cost function is given as:įirm A’s product is sold at a market price of $20 a unit. Firm A operates in a perfectly competitive market. The market price of the combo meal is $20.Īssume that the local government decides to impose a per-unit tax of $2.50 ONLY on Zach’s restaurant. Zach owns a small, perfectly competitive, fast-food restaurant in downtown Toronto. Topic 6 Practice Questions (Credit: Fred Miller/ Flickr/CC BY 2.0)ġ.
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