ECON 705 - Module 4 Exam Questions and Correct Answers Latest Update 2025 (Graded A+)
perfect competition - Answers a market consisting of a very large number of small firms producing an
identical product in which entry into and exit from the industry is not obstructed.
price takers - Answers Buyers and sellers in a competitive market that must accept the price determined
by the market.
What are the characteristics that define perfectly competitive markets? - Answers - Large # of buyers
and sellers.
- Same product.
- Prices charged by all firms known/price takers
- Negligible transaction costs
- Firms can freely enter or exit the market.
Total Revenue (TR) - Answers TR = P x Q
Average revenue (AR) - Answers AR = TR / Q = P
Marginal Revenue (MR) - Answers MR = ∆TR / ∆Q
The change in TR from selling one more unit.
What does MR = P mean for a Competitive Firm? - Answers - A competitive firm can keep increasing its
output without affecting the market price.
- So, each one-unit increase in Q causes revenue to rise by P, i.e., MR = P
What are examples of perfectly competitive markets? - Answers Although rare, agricultural
commodities, basic metals, foreign exchange, and financial securities
How does the market demand curve for a good differ from a firm's demand curve in a perfectly
competitive market? - Answers Although the market demand curve is downward sloping, the demand
for the output of an individual firm is perfectly elastic since it can produce and sell as much of its
product at a constant price.
How do competitive firms determine how much to produce in the short-run? - Answers - To maximize
profit find Q where MR(Q) = MC(Q)
- A competitive firm has a horizontal demand, so MR = P
- A profit-maximizing competitive firm produces the amount of output, Q, at which P = MC(Q)
perfect competition - Answers a market consisting of a very large number of small firms producing an
identical product in which entry into and exit from the industry is not obstructed.
price takers - Answers Buyers and sellers in a competitive market that must accept the price determined
by the market.
What are the characteristics that define perfectly competitive markets? - Answers - Large # of buyers
and sellers.
- Same product.
- Prices charged by all firms known/price takers
- Negligible transaction costs
- Firms can freely enter or exit the market.
Total Revenue (TR) - Answers TR = P x Q
Average revenue (AR) - Answers AR = TR / Q = P
Marginal Revenue (MR) - Answers MR = ∆TR / ∆Q
The change in TR from selling one more unit.
What does MR = P mean for a Competitive Firm? - Answers - A competitive firm can keep increasing its
output without affecting the market price.
- So, each one-unit increase in Q causes revenue to rise by P, i.e., MR = P
What are examples of perfectly competitive markets? - Answers Although rare, agricultural
commodities, basic metals, foreign exchange, and financial securities
How does the market demand curve for a good differ from a firm's demand curve in a perfectly
competitive market? - Answers Although the market demand curve is downward sloping, the demand
for the output of an individual firm is perfectly elastic since it can produce and sell as much of its
product at a constant price.
How do competitive firms determine how much to produce in the short-run? - Answers - To maximize
profit find Q where MR(Q) = MC(Q)
- A competitive firm has a horizontal demand, so MR = P
- A profit-maximizing competitive firm produces the amount of output, Q, at which P = MC(Q)
