Microeconomics: The Theory of the Firm under Perfect Competition

Topics in this chapter

• Firm Costs and Cost Curves
• Revenue, Demand, and Price Taking
• Short-Run Firm Equilibrium
• Short-Run Supply and Shutdown
• Market and Industry Equilibrium
• Long-Run Entry, Exit, and Equilibrium

Cheat sheet

Practice questions

1. Question 1Q-C604B3

   Why does an individual firm under perfect competition face a perfectly elastic demand curve at the market price?

   1. A.The firm can sell any quantity at the prevailing market price.
   2. B.The firm controls the market supply.
   3. C.The firm charges a price higher than the market price.
   4. D.The firm produces a unique product with no substitutes.
   See the answer and solution
2. Question 2Q-761A4F

   A perfectly competitive firm faces a price of ₹10 per unit. The marginal costs of its first four units are ₹6, ₹8, ₹10 and ₹13, respectively. Assuming marginal cost is rising, what output level maximises the firm's profit?

   1. A.1 unit
   2. B.2 units
   3. C.3 units
   4. D.4 units
   See the answer and solution
3. Question 3Q-1ED7B5

   In the short run, the market price of a product is ₹5 per unit, while the minimum average variable cost of a perfectly competitive firm is ₹7 per unit. What should the firm do?

   1. A.Continue producing because price is positive.
   2. B.Shut down temporarily because price is below minimum average variable cost.
   3. C.Increase output until average total cost is minimised.
   4. D.Produce where average variable cost equals marginal cost, regardless of price.
   See the answer and solution
4. Question 4Q-9039AA

   State the conditions for short-run profit maximisation by a firm under perfect competition, including the condition under which it shuts down.

   See the answer and solution
5. Question 5Q-93E4A6

   A perfectly competitive firm sells 8 units at a market price of ₹15 per unit. What are its total revenue and average revenue, respectively?

   1. A.₹120 and ₹15
   2. B.₹15 and ₹120
   3. C.₹23 and ₹8
   4. D.₹120 and ₹8
   See the answer and solution