Perfect Competition Economics Quiz

In perfect competition, the demand curve faced by a single firm is perfectly elastic. This means that the firm can sell any quantity of output at the market price without affecting the price.

Total revenue (TR) is calculated by multiplying the price of a good by the quantity sold. In a perfectly competitive market, the price is constant, so TR increases linearly with the quantity sold.

In perfect competition, the marginal revenue (MR) is equal to the price. This is because the firm can sell an additional unit of output at the prevailing market price without affecting the price.

Economic profit takes into account both explicit and implicit costs. Explicit costs are direct, out-of-pocket expenses like rent and wages. Implicit costs are the opportunity costs of using resources for one purpose instead of another.

Economic profit is calculated by subtracting both explicit and implicit costs from total revenue. It represents the true profitability of a business, taking into account all costs, including the opportunity cost of resources.

Sunk costs are costs that have already been incurred and cannot be recovered. These costs should not influence future decisions, as they are irrelevant to the current situation.

A perfectly competitive firm maximizes profit when marginal revenue (MR) equals marginal cost (MC). This means that producing one more unit of output brings in exactly the same amount of revenue as it costs to produce.

In the short run, a perfectly competitive firm should shut down if the price of its product falls below its average variable cost (AVC). This means that the firm is losing more money on each unit produced than it would by simply shutting down and incurring only fixed costs.

The short-run supply curve of a perfectly competitive firm is its marginal cost (MC) curve above its average variable cost (AVC) curve. This is because the firm will only produce output when the price is high enough to cover its variable costs and provide a profit.

In the long run, a perfectly competitive firm will earn zero economic profit. This is because free entry and exit in a perfectly competitive market will drive the price down to the point where all firms are just covering their costs, including the opportunity cost of their resources.

If a perfectly competitive industry is experiencing a period of economic profits, new firms will enter the market, attracted by the potential for profit. This will increase the supply in the market, driving prices down and eventually eroding profits.

The long-run supply curve in a perfectly competitive industry is horizontal if there are constant returns to scale. This means that the cost of producing one more unit of output does not change as the industry scale increases.

In monopoly, the demand curve faced by the firm is downward sloping. This means that the monopolist can charge a higher price for its output by selling fewer units. This is because the monopolist has market power and can influence the price.

The marginal revenue (MR) curve for a monopolist is below the demand curve. This is because the monopolist must lower the price of all units sold in order to sell one additional unit. This means that the MR of each additional unit is lower than the price of that unit.

A monopolist maximizes profit by producing at the quantity where marginal revenue (MR) equals marginal cost (MC). This is the same profit-maximizing rule as in perfect competition, but the key difference is that the monopolist faces a downward-sloping demand curve.