Question

1. At what quantity does the profit-maximizing perfectly competitive firm produce?

A. where total revenue minus marginal revenue is at a maximum

B. where marginal revenue minus marginal cost is at a maximum

C. where total revenue minus total cost is at a minimum

D. where marginal revenue minus marginal cost is at a maximum

E. where marginal revenue is equal to marginal cost

2. What is the consequence of a firm selling a similar product in a competitive market?

A. The firms capture some market power.

B. All the firms in the industry are the same size.

C. Firms in the industry can produce the same product with a different quantity of inputs.

D. The product sold by one firm is a perfect complement for the products sold by other firms in the industry.

E. The product sold by one firm is a perfect substitute for the products sold by other firms in the same industry.

Answer 1

1. Option E.

• A profit maximizing perfectly competitive firm usually produces an output quantity at a point where it's marginal revenue equals marginal cost.
• At this point of interesection of both the curves, the firm maximizes it's profits.
• The condition of profit maximization is given by P= MC = MR in a perfectly competitive market.

2. Option E.

• In a perfectly competitive market firms usually produce identical or homogenous products.
• This means that each product produced by different firms in the same industry are perfect substitutes of each other.
• This means that if any one firm tries to raise the price of its products, it will loose its customer's.