Perfect competition and the supply curve

Question 1

A perfectly competitive market involves:

Answer 1

Many buyers and sellers
All firms offer the same products
The products are homogeneous

Question 2

For a perfectly competitive firm, P =

Answer 2

AR = MR, a horizontal line

Question 3

In the short run, the firm will shut down if:

Answer 3

It’s revenue does not cover its variable costs

Question 4

In the long run, the firm will shut down if:

Answer 4

It’s revenue does not cover total cost (fixed cost + variable cost)

Question 5

The short run supply curve is the:

Answer 5

The horizontal summation of the MC curves already in the industry
MC curve above AVC

Question 6

The long run supply curve is the:

Answer 6

MC curve above ATC

Question 7

In the long run, there is:

Answer 7

Freedom of entry and exit

• New firms will be attracted to the industry by economic profit
• Existing firms will depart from the industry if they are making economic loss

Question 8

The long run equilibrium price in perfect competition is one where:

Answer 8

There are no incentives to enter or exit the market
Economic profit is zero
P = min{LRATC} = min{SRATC}

Question 9

If firms enter the market, the supply curve:

Answer 9

Shifts to the right

Question 10

If firms exit the market, the supply curve:

Answer 10

Shifts to the left