Page 165 - DECO101_MICRO_ECONOMICS_ENGLISH

Micro Economics

Notes 10.9 Review Questions

1. In which condition under perfect competition, would a fi rm maximize profi t in the short
run?
2. A firm can sell its product for ` 20 each in a perfectly competitive output market. Its total

cost of production for the production range of 200 units to 205 units is given below:
200 201 202 203 204 205
` 3600 ` 3615 ` 3634 ` 3658 ` 3688 ` 3720

What is the profit maximising level of production?
3. To maximize the profit in the short run, a perfectly competitive firm produces the output

for which price is equal to average variable cost- Why/ Why not?
4. Why are firms operating under conditions of perfect competition depicted as having a

horizontal demand curve?
5. What will happen to the demand curve of a perfectly competitive fi rm if:
(a) new sellers are attracted to the industry by the existence of supernormal profi ts?
(b) there is an increase in market demand for the fi rm’s output?
6. Why is it inappropriate to refer to a perfectly competitive firm as ‘earning supernormal

profit in the long-run’?
7. Under what conditions will a firm operating in a perfectly competitive industry choose to

leave the industry?

8. For a perfectly competitive firm, why is it insufficient to say that profit maximisation takes
place at the output where marginal cost equals marginal revenue?
9. In the perfect market, if individuals are enjoying consumers’ surplus, does it mean that, as
a consequence, producers are not receiving producers’ surplus?
10. The case of perfect competition is sometimes referred to as a ‘benchmark’ industrial structure.
In this context, what do you think commentators mean by the term ‘benchmark’?
11. Taking a real life example, discuss the features of the perfect competition.
12. Why is a firm under perfect competition described as a price-maker? Deduce its equilibrium

conditions in the short run.

13. Assume that firms in the short run are earning above normal profits. Explain what will

happen to these profits in the long run for a market having perfect competition.
14. How and when will you determine the closing down point in the short run?
15. Explain LMC= LAC= P. Comment.
16. Examine the shut down decision in the long run.

Answers: Self Assessment

1. True 2. False
3. False 4. False
5. True 6. True

7. False 8. False

160 LOVELY PROFESSIONAL UNIVERSITY