Question text 1

Which of the following best describes the relationship between supply curve and the marginal cost curve for the purely competitive firm in the short run?

a. The supply curve is the same as the marginal cost curve throughout its upward sloping part.

b. The marginal cost curve and supply curve are the same above the average total cost curve.

c. The supply curve is the same as the marginal cost curve above the average variable cost curve.

d. The marginal cost curve has nothing to do with supply curve.

Question text 2

Which of the following best explains the significance of the statement that for firms in a purely competitive market, price equals marginal cost?

Select one:

a. This has no significance, because profits are maximized or losses minimized when a firm operates at the level at which mariginal cost is equal to marginal revenue.

b. It is of no significance because that equality can be obtained only by government manipulation of price.

c. This has great significance, because when price equals marginal cost, the allocation of resources is most efficient in producing that combination of goods that consumers prefer.

d. The equation has great significance, because at this point the firm is obtaining economic profits.

Question text 3

Which of the following best states why why in the short run a firm may decide to continue to produce, even with economic losses?

Select one:

a. Price is greater than average variable cost but less tha average total cost.

b. Total revenue is greater than total variable cost but less than total cost.

c. All of the above are reasons for continuing production.

d. One of the above is incorrect.

e. Economic losses areless than fixed cost.

Question text 4

Which of the following explains why in the long run the purely competitive firm produces at lowest possible cost?

Select one:

a. There are no advertising costs to add to production costs.

b. The demand is equal to average revenue which equals marginal revenue curve is perfectly elastic and intersects the long run average cost curve at its lowest point, thus, the firm produces at full capacity.

c. There are no economic profits.

d. All of the above are correct.

Question 5

Why in the long run, the purely competitive firm in a constant cost industry achieves only normal profits?

Select one:

a. New firms entering the industry increase supply, reduce price and squeeze out the economic profit.

b. In the long run, normal profit is not the only situation that can face a purely competitive firm.

c. New firms entering the industry do not affect supply since they divide up the existing market, but costs to the firm increase and this squeezes out the economic profit.

d. Economic profits do not exist in the long run, since they cannot exist in the short run because of competition