QUESTION 1 (MULTIPLE CHOICE) I . A profit-maximising firm sells its product for

Question

QUESTION 1 (MULTIPLE CHOICE)

I. A profit-maximising firm sells its product for $300, but continues to produce even though it is making a loss. This suggests that [1] the marginal cost is less than the price. [2] the average fixed cost is less than the price. [3] the average variable cost is less than the price. [4] the average total cost is less than the price.

II. A perfectly competitive firm is described as a market with: [1] a few firms producing differentiated goods. [2] a few buyers, many sellers and the production of differentiated goods. [3] many buyers, many sellers and the production of homogenous goods. [4] a large number of firms that each individually sets the price of their goods.

III. The determination of the price of a product in a perfectly competitive market is where the [1] supply and demand curves intersect. [2] quantity supplied and quantity demanded intersect. [3] marginal cost equals the price of the product. [4] marginal revenue equals the marginal cost.

IV. At what price should a firm produce to maximise profits in a perfectly competitive market? [1] where price equals marginal cost [2] where price equals marginal revenue [3] where price equals total revenue [4] where price equals average revenue

V. When a perfectly competitive industry is in a long-run equilibrium, all the firms in the industry will [1] earn an economic profit. [2] make an economic loss. [3] earn a normal profit. [4] earn zero profits.

VI. Which of the following correctly characterises a perfectly competitive labour market? [1] a large number of firms and a large number of workers [2] imperfect information [3] employees and employers having individual control over the market wage rate [4] very few skilled workers

VII. Which of the following is true of the profit-maximising level of employment in a perfectly competitive labour market? [1] The marginal revenue product equals the value of marginal product. [2] The marginal revenue product equals the marginal cost of labour. [3] The marginal product equals the marginal revenue product. [4] The marginal product equals the marginal cost of labour.

Explanation / Answer

1) Even if the firm is making loss it still produces because it can cover up the part of variable cost. The firm will shut down when it is not able to cover its variable cost. So the firm is selling at 300$ even after making loss means that the price is greater than average variable cost. The answer is option 3

2) It is one of the feature of perfect competion that there are large buyers and sellers and the product sold by them are identical in nature. Every firm is free to enter ans exit the firm. The price is determined by marker forces. Therefore, the answer is option 3.

3)In perfectly competitive market, the firms are price takers. And price is determined by intersection odlf supply and demand curve. The answer is option 1.

4)In perfectly competitive market, the firms cannot earn supernormal profits. In order to maximize profits the firms should set price equals to marginal cost. The answer is option 1.

5)In the long run firms are in equilibrium when they produce till the minimum point of their long run Average cost curve. They would be earning normal profits. If the firms are earning supernormal profit then new firms are attracted and that will bring down the price and an upward shift of cost curve as increase in procedures factors as industry expands. Similarly, when firm is making losses the other firms will leave the industry which will raise the price and cost will fall. The ansans is option 3.

6) Just as the perfectly comcompetit product market, the perfectly competitive labour market has large firms and large workers. Answer is option 1.

7) The perfectly compcompeti labour market is price takers. They earn maximum profit when marginal reverev equals the marginal cost. The answer is option 2.

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