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Perfect Competitive Market (PCM)

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Questions and Answers

In a perfect competitive market, why is the demand curve perfectly elastic?

Because firms have perfect knowledge in the market

Because there are many buyers and sellers

Because the price is set by the market

Because firms cannot raise their prices without losing demand (correct)

Why are firms in a perfect competitive market considered 'price takers'?

Because they produce homogenous products

Because they can raise prices without affecting demand

Because the market sets the price and firms must accept it (correct)

Because they set the prices for their products

What condition must firms in a perfect competitive market meet to make normal profit in the long run?

Produce at the point where Marginal Revenue (MR) equals Marginal Cost (MC) (correct)

Produce at the point where Marginal Cost (MC) equals Average Revenue (AR)

Produce at the point where Marginal Revenue (MR) equals Average Revenue (AR)

Produce at the point where Average Revenue (AR) equals Average Cost (AC)

What does the equality between Marginal Revenue (MR) and Marginal Cost (MC) determine for firms in a perfect competitive market?

Profit maximization Signup and view all the answers

Why do firms in a perfect competitive market produce where Marginal Revenue (MR) equals Marginal Cost (MC)?

To ensure all costs are covered Signup and view all the answers

In a perfect competitive market, what happens to abnormal profit in the long run?

It disappears Signup and view all the answers

What would happen to a firm in a perfect competitive market that tries to raise its prices above the market price?

It would lose its customers to other firms Signup and view all the answers

Why does a firm in a perfect competitive market set its production level where MR=MC?

To maximize profit Signup and view all the answers

What happens to firms making abnormal profits in the long run in a perfect competitive market?

Their abnormal profits disappear over time. Signup and view all the answers

Why do firms in a perfect competitive market produce at a point where MR=MC?

To maximize profit. Signup and view all the answers