1-7 True or False
1) In the short run, a perfectly competitive firm can earn positive, zero, or negative profit depending on the market price of the firm's output.
2)In the model of the perfectly competitive firm, the firm's fixed costs are equal to its implicit costs of production.
3)Assume the market price is greater than average total cost at the perfectly competitive firm's profit-maximizing level of output. In this case, the firm is earning positive economic profits, which act as an incentive for new firms to enter the market.
4)Assume that at the current level of output, price equals marginal revenue, but is less than average total cost. So long as price is greater than average variable cost, the firm should continue to operate in the short run to minimize its losses.
5)The fact that a firm is a price-setter does not ensure it will make a positive economic profit in the short run and over time.
6)Barriers to entry serve to limit the number of firms that operate in a particular market and, as 11) such, reduce the amount of total profit earned in the market.
7)In the prisoner's dilemma game, each player's dominant strategy is also the Nash equilibrium.
14-17 Multiple Choice
14) Marginal revenue is equal to:
A) the change in P x Q due to a one unit change in output. B) the change in quantity divided by the change in price.
C) the change in price divided by the change in output. D) price, but only if the firm is a price searcher.
15) In order to maximize its profits, a price-taking firm should produce the level of output at which:
A) marginal revenue = marginal cost. B) total revenue = total cost.
C) variable revenue = variable cost. D) average revenue = average cost.
16) Assume that there is an improvement in the technology used by firms in a perfectly competitive industry that is initially in long-run equilibrium. In the short run this would cause:
A) cannot be determined with the information given. B) no change in the firm's economic profit.
C) a decrease in the firm's economic profit. D) an increase in the firm's economic profit.
17) Assume at the firm's profit-maximizing level of output P = AVC. In this case, the firm will be:
A) incurring an economic loss. B) earning a positive economic profit.
C) earning economic profit = 0. D) breaking even.
