Perfect Competition

A perfectly competitive firm is producing 1000 drinks bottles per week which it sells for £2.50 per bottle.

Producing 1000 bottles per week incurs the following costs:

Total fixed cost £1000

Total variable cost £2000

Marginal cost £2.50

In the short run, what should the firm do to maximise its profits or minimise its losses?

• Raise its price

• lower its price

• leave output unchanged

• shut down

A firm is operating in a perfectly competitive market, and is making supernormal profits. What is the likely outcome for this firm in the long run?

• It will leave the industry

• The price of the product will rise

• The firm’s output will fall and the price will fall

• Both the price and the firm’s output will remain unchanged

If firms are choosing to leave a perfectly competitive industry then it must be the case that:

• Average total cost is equal to average revenue

• Average variable cost is greater than average revenue

• Average fixed cost is greater than average revenue

• Average revenue is greater than marginal revenue

Which of the following is not a characteristic of perfect competition?

• A large number of small producers and consumers

• A single market price

• A homogeneous product

• A perfectly inelastic demand curve for each firm

For firms in perfect competition:

• AR is less than MR, andboth are positive

• AR is greater than MR, which is zero

• AR is equal to MR, and both are positive

• AR is equal to MR, and both are zero

The table to the left provides information regarding the costs and revenues for a cotton producer:

In which range of output will profits be maximised?

• 7 – 8 tonnes

• 8 – 9 tonnes

• 10 – 11 tonnes

• 12 – 13 tonnes

In which of the diagrams to the left does output level Q represent the level of output produced by a firm in perfect competition in the long run?

• Diagram A

• Diagram B

• Diagram C

• Diagram D

The diagram below represents a firm operating in perfect competition in the short run.

In order for long-run equilibrium to be achieved:

• Some firms must leave the industry

• More firms must enter the industry

• Incumbent firms must lower their price

• New entrants must charge a higher price than incumbent firms

The losses made by firms in perfect competition in the short-run will disappear in the long run because:

• There is freedom of exit in this market structure

• Firms will differentiate their products

• Sunk costs will disappear

• Firms will engage in more advertising

Which of the following market features suggests that a firm is operating in a perfectly competitive market?

• The marginal cost is equal to average cost when average cost is minimised

• The firm does not carry out advertising

• Marginal revenue is equal to average revenue

• Normal profits are earned