 ## Perfect competition - self-test questions 1

##### Assumptions of perfect competition

Which of the following are assumptions we make about perfect competition? (Select all responses that are correct)

 a) A large number of industries b) A large number of firms c) Each firm is a price-taker d) No government intervention e) Identical products f) Information on the activities of other firms is generally available Yes, that's correct. Well done. A large number of industries is not a condition of perfect competition as we are looking at just one industry. A lack of government intervention is not a condition and perfect competition requires perfect knowledge, not just reasonable access to information.No, that's not right. Have another go. A large number of industries is not a condition of perfect competition as we are looking at just one industry. A lack of government intervention is not a condition and perfect competition requires perfect knowledge, not just reasonable access to information.Your answer has been saved. 2

##### Long-run equilibrium - perfect competition

Which of the following will be true when a firm is in long-run equilibrium in perfect competition? (Select all responses that are correct)

 a) MC=MR b) AC=AR c) The firm is making supernormal profit d) MC=AR e) The average cost curve will be tangential to the marginal revenue curve f) The marginal cost curve will be horizontal a) Yes, that's correct. MC=MR means that the firm will be maximising profits. This is true in long-run equilibrium.a) No, that's not right. MC=MR means that the firm will be maximising profits. This is true in long-run equilibrium.b) Yes, that's correct. AC=AR means that the firm will be making normal profits. This is true in long-run equilibrium.b) No, that's not right. AC=AR means that the firm will be making normal profits. This is true in long-run equilibrium.c) Yes, that's correct. In long-run equilibrium the firm will make just normal profits.c) No, that's not right. In long-run equilibrium the firm will make just normal profits.d) Yes, that's correct. In long-run equilibrium MC=MR=AC=AR, and so MC=AR.d) No, that's not right. In long-run equilibrium MC=MR=AC=AR, and so MC=AR.e) Yes, that's correct. The average cost curve will just touch the average revenue curve and so is tangential.e) No, that's not right. The average cost curve will just touch the average revenue curve and so is tangential.f) Yes, that's correct. The MC curve will be upward sloping, not horizontal. It is the MR curve that is horizontal.f) No, that's not right. The MC curve will be upward sloping, not horizontal. It is the MR curve that is horizontal. 3

##### Long-run equilibrium - perfect competition

Which of the following will be true when a firm is in short-run equilibrium in perfect competition?

 a) MC=MR b) AC=AR c) The firm is making supernormal profit d) MC=AR e) The average cost curve will be tangential to the marginal revenue curve f) The marginal cost curve will be horizontal a) Yes, that's correct. MC=MR means that the firm will be maximising profits. This is true in short-run equilibrium.a) No, that's not right. MC=MR means that the firm will be maximising profits. This is true in short-run equilibrium.b) Yes, that's correct. AC=AR means that the firm will be making normal profits. This is NOT true in short-run equilibrium as the firm can be making supernormal profits in the short-run.b) No, that's not right. AC=AR means that the firm will be making normal profits. This is NOT true in short-run equilibrium as the firm can be making supernormal profits in the short-run.c) Yes, that's correct. In short-run equilibrium the firm can make supernormal profits.c) No, that's not right. In short-run equilibrium the firm can make supernormal profits.d) Yes, that's correct. In short-run equilibrium the firm can be making supernormal profits and so MC does not need to be equal to AR. This will only be true in long-run equilibrium.d) No, that's not right. In long-run equilibrium MC=MR=AC=AR, and so MC=AR.e) Yes, that's correct. In short-run equilibrium the firm can be making supernormal profits and so the AC curve can be below the MR (AR) curve. This will only be true in long-run equilibrium.e) No, that's not right. In short-run equilibrium the firm can be making supernormal profits and so the AC curve can be below the MR (AR) curve. This will only be true in long-run equilibrium.f) Yes, that's correct. The MC curve will be upward sloping, not horizontal. It is the MR curve that is horizontal.f) No, that's not right. The MC curve will be upward sloping, not horizontal. It is the MR curve that is horizontal. 4

##### Shut down price

Select appropriate options in the paragraph below to make up a suitable description of the shut-down price.

A firm may make a in the short run, providing is being covered and some contribution is being made to the fixed cost. If a firm is at least unable to cover its in the i.e. its day-to-day running costs, it will shut down immediately. In the the firm will need to at least break-even or make a if it is to survive.

Yes, that's correct. Well done.No, that's not right. Have another go.Your answer has been saved. 