Question

1. If at its current production level, a perfectly competitive firm's marginal revenue and longminus?run marginal cost are equal to $0.50 and its longminus?run average cost is $0.35, which of the following statements is true?

A. The firm should expect the market price of its product to fall.

B. The firm should expect to earn positive economic profit indefinitely.

C. The firm should expect the market supply curve to decrease.

D.The firm should expect the market price of its product to increase.

2. If the market price is $4 and a perfectly competitive firm is producing 3,200 units and the marginal cost to produce the 3,200th unit is $3.88, which of the following is true?

A. The firm is maximizing profit.

B. The firm should decrease production to maximize profit.

C.The difference between marginal revenue and marginal cost (MR ? MC )for the 3,200th unit is negative.

D. The firm should increase production to maximize profit.

3. In a perfectly competitive market, an increase in the market demand will shift the perfectly competitive firm's ________ curve ________.

A. marginal cost; downward

B. demand; downward

C. marginal cost; upward

D. demand; upward

Answer 1

a) For a competitive industry the MR curve, MC curve, and Price are the same. In the long run the, the produce at the point where the Average cost is equal to the price. i.e. Average cost is also equal. If the AC is more, in the long run, the firms will be facing a profit if the AC is less than the price and more firms will come in and the price of the product will decrease.

The answer is "A", The firm should expect the market price of its product to fall.

b) "D"

The firm should increase the production to increase the profit. In a perfect market condition, the price of the product is equal to the MC if less the firm can expand the production to the level where the price is equal to the MC.

c) "D"

For a competitive firm, the price is the demand curve. If the market demand rises the price will rise and the demand curve will shift upward.