ECO 201 Chapter 12 Exam Questions and Answers Fully Solved
What is a perfectly competitive market? - Answers A market that meets the conditions..
1. many buyers and sellers.
2. all firms selling identical products.
3. no barriers to new firms entering the market.
Why can a firm in a perfectly competitive market sell as much as it wants without having to lower its
price? - Answers Because the firm is small relative to the market and all firms are selling the same
product.
What does the demand curve for a perfectly competitive firm look like? What is it equal to? - Answers A
horizontal line at the market price. It is equal to marginal revenue.
Can a firm in a perfectly competitive market raise its price without losing sales? - Answers No. Because
all products are the same, consumers will go elsewhere for a cheaper product.
In a perfectly competitive market, how do you find the profit maximizing level of output? - Answers It
occurs at the Q where marginal revenue equals marginal cost.
In the short run, a firm experiencing losses can continue to produce or shut down temporarily. When
should the firm shut down? Why? - Answers They should shut down when total revenue is less than
variable costs. If it does not produce, a firm suffers losses equal to fixed costs. So if total revenue is
greater than variable costs, the firms would experience less of a loss if they continued to produce.
What is a firms shut down point? What happens P goes below this point? - Answers The minimum point
on a firms average variable cost curve. If the price falls below this point the firm shuts down production
in the short run.
How do you find the market supply curve in a perfectly competitive market from the marginal cost
curves of the firms in the market? - Answers By adding up the quantity supplied by each firm in the
market at each price.
What is economic profit equal to? - Answers A firms revenues minus all its costs, implicit and explicit.
When a firm enters a perfectly competitive market, what happens to the economic profits to a particular
firm? Why? Exits? - Answers They go down because the demand curve, or marginal revenue curve, goes
down. Opposite happens when firms exit a PCM.
When does a firm experience economic loss? - Answers When the firm's total revenue is less than its
total cost, including all implicit costs.
What is a perfectly competitive market? - Answers A market that meets the conditions..
1. many buyers and sellers.
2. all firms selling identical products.
3. no barriers to new firms entering the market.
Why can a firm in a perfectly competitive market sell as much as it wants without having to lower its
price? - Answers Because the firm is small relative to the market and all firms are selling the same
product.
What does the demand curve for a perfectly competitive firm look like? What is it equal to? - Answers A
horizontal line at the market price. It is equal to marginal revenue.
Can a firm in a perfectly competitive market raise its price without losing sales? - Answers No. Because
all products are the same, consumers will go elsewhere for a cheaper product.
In a perfectly competitive market, how do you find the profit maximizing level of output? - Answers It
occurs at the Q where marginal revenue equals marginal cost.
In the short run, a firm experiencing losses can continue to produce or shut down temporarily. When
should the firm shut down? Why? - Answers They should shut down when total revenue is less than
variable costs. If it does not produce, a firm suffers losses equal to fixed costs. So if total revenue is
greater than variable costs, the firms would experience less of a loss if they continued to produce.
What is a firms shut down point? What happens P goes below this point? - Answers The minimum point
on a firms average variable cost curve. If the price falls below this point the firm shuts down production
in the short run.
How do you find the market supply curve in a perfectly competitive market from the marginal cost
curves of the firms in the market? - Answers By adding up the quantity supplied by each firm in the
market at each price.
What is economic profit equal to? - Answers A firms revenues minus all its costs, implicit and explicit.
When a firm enters a perfectly competitive market, what happens to the economic profits to a particular
firm? Why? Exits? - Answers They go down because the demand curve, or marginal revenue curve, goes
down. Opposite happens when firms exit a PCM.
When does a firm experience economic loss? - Answers When the firm's total revenue is less than its
total cost, including all implicit costs.
