Perfect Competition: Price Taker, Short-Run Equilibrium, Long-Run Equilibrium, Normal Profit, Efficiency

1. In perfect competition, a firm is a price taker because

A it produces a differentiated product
B it faces a perfectly elastic demand curve at the market price
C it controls the market supply
D it can raise price without losing customers

2. Which feature is essential for perfect competition?

A high barriers to entry
B product differentiation
C many buyers and sellers
D price leadership

3. A perfectly competitive firm’s demand curve is

A downward sloping
B upward sloping
C perfectly elastic
D perfectly inelastic

4. In perfect competition, the individual firm’s average revenue curve is

A above the marginal revenue curve
B below the marginal revenue curve
C the same as the marginal revenue curve
D unrelated to price

5. Which relationship is correct for a perfectly competitive firm?

A P = AR = MR
B P > AR > MR
C AR > MR > P
D MR = MC = AC at all outputs

6. A perfectly competitive firm maximises profit where

A AR = AC
B MR = MC
C MR = 0
D AC is highest

7. In perfect competition, because P = MR, the profit-maximising condition can also be written as

A P = MC
B P = AC
C P = AFC
D P = TC

8. A firm in perfect competition sells 200 units at $12 each. Its total revenue is

A $12
B $200
C $2400
D $212

9. A perfectly competitive firm sells each unit at $15. If it increases output from 40 to 41 units, marginal revenue is

A $0
B $1
C $15
D $615

10. If a perfectly competitive firm faces market price of $20, its AR and MR are

A AR = 20, MR = less than 20
B AR = less than 20, MR = 20
C AR = 20, MR = 20
D AR = 0, MR = 20

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.

11. A perfectly competitive firm has the following data at output 50: price = $10, average cost = $8. What is its profit position?

A normal profit only
B supernormal profit
C loss
D shutdown must occur

12. A perfectly competitive firm has price = $12 and average cost = $12 at its chosen output. It earns

A supernormal profit
B normal profit
C economic loss
D producer surplus only

13. A perfectly competitive firm has price = $9 and average cost = $11 at its chosen output. It earns

A supernormal profit
B normal profit
C loss
D zero total cost

14. If price is greater than average cost at the profit-maximising output, a perfectly competitive firm earns

A supernormal profit
B normal profit only
C loss
D negative revenue

15. If price equals average cost at the profit-maximising output, a perfectly competitive firm earns

A supernormal profit
B normal profit
C loss
D abnormal profit necessarily

16. If price is below average cost at the profit-maximising output, a perfectly competitive firm earns

A supernormal profit
B normal profit
C loss
D zero revenue

17. In the short run, a perfectly competitive firm may earn supernormal profit because

A firms cannot enter the market immediately
B all firms can enter instantly
C products are differentiated
D the firm controls price

18. In the long run, supernormal profit in perfect competition is eliminated by

A firms leaving the industry
B new firms entering the industry
C government fixing price below cost
D existing firms reducing output to zero

19. In the long run, losses in perfect competition are eliminated by

A new firms entering the industry
B firms leaving the industry
C firms raising price independently
D firms differentiating products

20. If firms enter a perfectly competitive industry, market supply will

A shift right and lower market price
B shift left and raise market price
C stay unchanged
D become perfectly inelastic

21. If firms leave a perfectly competitive industry, market supply will

A shift right and lower market price
B shift left and raise market price
C become infinite
D eliminate demand

22. Long-run equilibrium in perfect competition occurs when firms earn

A supernormal profit
B normal profit
C losses
D monopoly profit

23. In long-run perfect competition, firms produce where

A P = MR = MC = AC at minimum AC
B P > MC and AC is falling
C MR = 0 and AC is maximum
D P < AVC permanently

24. Long-run perfect competition achieves productive efficiency because firms produce where

A price is highest
B average cost is minimised
C total revenue is maximised
D marginal revenue is zero

25. Long-run perfect competition achieves allocative efficiency because

A P = MC
B P > MC
C MC = AC only
D AR = AVC only

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.

26. A perfectly competitive firm is producing where MC = MR, price = $18 and AC = $14. What will happen in the long run?

A firms enter, supply rises, price falls
B firms leave, supply falls, price rises
C price remains permanently above AC
D the firm becomes a monopoly

27. A perfectly competitive firm is producing where MC = MR, price = $8 and AC = $10. What will happen in the long run?

A firms enter, supply rises, price falls
B firms leave, supply falls, price rises
C all firms earn supernormal profit
D demand becomes perfectly elastic for the market

28. Which condition must hold for a perfectly competitive firm to continue producing in the short run despite making losses?

A price must be at least equal to average variable cost
B price must be below average variable cost
C price must equal total fixed cost
D price must be zero

29. The shutdown point in the short run occurs where

A P = AVC minimum
B P = AC maximum
C MR = 0
D AFC = MC maximum

30. If price is below average variable cost, a perfectly competitive firm should

A continue producing to cover some fixed costs
B shut down in the short run
C increase output until MR = 0
D enter the industry

31. If price is above AVC but below AC, a perfectly competitive firm should

A shut down immediately
B continue producing in the short run while making a loss
C earn supernormal profit
D produce zero output in the long run only and never in the short run

32. A firm’s price is $10, AVC is $7 and AC is $12 at the profit-maximising output. The firm should

A shut down because price is below AC
B continue in the short run because price exceeds AVC
C earn supernormal profit
D raise price to $12

33. A firm’s price is $6, AVC is $8 and AC is $11 at the profit-maximising output. The firm should

A continue because price covers some fixed cost
B shut down because price is below AVC
C earn normal profit
D produce where price equals AC

34. In the short run, a perfectly competitive firm’s supply curve is

A the MC curve above the minimum AVC
B the AC curve above the minimum AC
C the MR curve below AR
D the demand curve below price

35. In the long run, a perfectly competitive industry’s supply changes mainly through

A entry and exit of firms
B price leadership
C collusion
D advertising

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.

36. Perfect competition assumes perfect knowledge because

A consumers and producers know prices and product quality
B firms keep technology secret
C consumers cannot compare products
D workers cannot move jobs

37. Perfect mobility of factors means

A resources can move freely between uses
B consumers cannot switch suppliers
C firms cannot enter or leave
D workers are fixed permanently in one firm

38. Homogeneous products mean

A products are identical from consumers’ viewpoint
B every firm sells a unique product
C branding is the main source of market power
D consumers pay higher prices for advertising

39. Why does a perfectly competitive firm have no incentive to advertise heavily?

A it sells a homogeneous product and can sell all it wants at the market price
B it controls the market price
C advertising makes demand perfectly inelastic
D it earns monopoly profit forever

40. Which factor would make a market less perfectly competitive?

A many small firms
B free entry and exit
C strong brand loyalty
D identical products

41. A market contains thousands of wheat farmers selling identical wheat. This is close to perfect competition because

A each farmer has significant price-setting power
B each farmer is small relative to the market
C each farmer sells a unique product
D entry is completely impossible

42. Which market is least likely to be perfectly competitive?

A foreign exchange market with many buyers and sellers
B agricultural market with many small producers
C market for branded smartphones
D online market for identical digital currency units

43. A perfectly competitive firm’s short-run supernormal profit is shown by

A the area where price exceeds average cost over the output sold
B the area where average cost exceeds price over output
C total fixed cost only
D the gap between AVC and AFC only

44. A perfectly competitive firm’s short-run loss is shown by

A price above AC multiplied by output
B AC above price multiplied by output
C price multiplied by marginal cost
D output divided by fixed cost

45. A firm produces 100 units. Price is $15 and AC is $11. Total profit is

A $400
B $1100
C $1500
D $2600

46. A firm produces 80 units. Price is $9 and AC is $12. Total loss is

A $3
B $80
C $240
D $960

47. A firm produces 50 units. Price is $20, AVC is $14 and AC is $25. What is its short-run position?

A supernormal profit and continue producing
B loss but continue producing
C shutdown because price is below AVC
D normal profit

48. A firm produces 60 units. Price is $10, AVC is $12 and AC is $16. What is its short-run position?

A continue producing because price covers AVC
B shut down because price is below AVC
C earn normal profit
D earn supernormal profit

49. Which chain best explains long-run adjustment from supernormal profit in perfect competition?

A supernormal profit → entry of new firms → market supply rises → price falls → normal profit
B supernormal profit → exit of firms → market supply falls → price rises → monopoly profit
C loss → entry of firms → supply rises → price falls further → normal profit
D normal profit → firms enter forever → price becomes zero

50. Which chain is most accurate for long-run efficiency in perfect competition?

A free entry and exit → normal profit → production at minimum AC and P = MC → productive and allocative efficiency
B barriers to entry → supernormal profit forever → P > MC → allocative efficiency
C product differentiation → advertising → P = MC always → productive efficiency
D price leadership → collusion → minimum AC always → perfect consumer welfare

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.

1. Answer: B

A wrong: differentiated products are found in monopolistic competition.
B correct: a perfectly competitive firm is a price taker because it can sell any amount at the market price but cannot raise price without losing buyers.
C wrong: one firm is too small to control market supply.
D wrong: if it raises price, buyers switch to identical products from rivals.

2. Answer: C

A wrong: perfect competition requires free entry and exit, not high barriers.
B wrong: products are homogeneous, not differentiated.
C correct: many buyers and sellers prevent any single firm from influencing price.
D wrong: price leadership is linked to oligopoly.

3. Answer: C

A wrong: a downward-sloping demand curve applies to firms with market power.
B wrong: demand does not rise with price.
C correct: the firm faces a perfectly elastic demand curve at the market price.
D wrong: perfectly inelastic demand would mean quantity demanded unchanged at all prices.

4. Answer: C

A wrong: AR is not above MR in perfect competition.
B wrong: AR is not below MR.
C correct: AR = MR = price for a perfectly competitive firm.
D wrong: AR is the price received per unit.

5. Answer: A

A correct: a price-taking firm sells every unit at the market price, so P = AR = MR.
B wrong: this applies more to imperfect competition where MR is below AR.
C wrong: MR is not above price.
D wrong: AC does not equal TC; TC is total cost.

6. Answer: B

A wrong: AR = AC shows normal profit, not profit maximisation.
B correct: profit is maximised where MR = MC.
C wrong: MR = 0 gives revenue maximisation.
D wrong: high AC reduces profit.

7. Answer: A

A correct: since P = MR in perfect competition, MR = MC becomes P = MC.
B wrong: P = AC shows normal profit, not the general profit-maximising condition.
C wrong: P = AFC has no profit-maximising meaning.
D wrong: P cannot equal total cost as a per-unit price rule.

8. Answer: C

A wrong: $12 is price per unit.
B wrong: 200 is quantity.
C correct: TR = 200 × $12 = $2400.
D wrong: $212 adds price and quantity.

9. Answer: C

A wrong: MR is not zero because the firm sells one more unit.
B wrong: $1 is the change in output, not revenue.
C correct: in perfect competition, MR = price = $15.
D wrong: $615 is total revenue at 41 units.

10. Answer: C

A wrong: MR is not below AR in perfect competition.
B wrong: AR equals price.
C correct: AR = MR = P = $20.
D wrong: AR is not zero if price is $20.

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.

11. Answer: B

A wrong: normal profit occurs when price equals average cost.
B correct: price $10 is above AC $8, so the firm earns supernormal profit of $2 per unit.
C wrong: loss occurs when price is below AC.
D wrong: shutdown depends on AVC, not AC alone.

12. Answer: B

A wrong: supernormal profit requires price above AC.
B correct: price equals average cost, so the firm earns normal profit.
C wrong: there is no economic loss because revenue covers total cost including normal profit.
D wrong: producer surplus is not the same as profit.

13. Answer: C

A wrong: supernormal profit requires price above AC.
B wrong: normal profit requires price equal to AC.
C correct: price $9 is below AC $11, so the firm makes a loss.
D wrong: total cost is not zero.

14. Answer: A

A correct: if price is above AC, revenue per unit exceeds cost per unit, so supernormal profit is earned.
B wrong: normal profit requires P = AC.
C wrong: loss occurs when P < AC.
D wrong: revenue is not negative.

15. Answer: B

A wrong: supernormal profit requires P > AC.
B correct: P = AC means total revenue equals total cost including normal profit.
C wrong: loss requires P < AC.
D wrong: abnormal/supernormal profit is not earned.

16. Answer: C

A wrong: supernormal profit requires P > AC.
B wrong: normal profit requires P = AC.
C correct: P < AC means the firm is making an economic loss.
D wrong: revenue is not zero unless output or price is zero.

17. Answer: A

A correct: in the short run, entry is not immediate, so existing firms may earn supernormal profit.
B wrong: instant entry would remove supernormal profit immediately.
C wrong: products are homogeneous.
D wrong: the firm has no price control.

18. Answer: B

A wrong: firms leave when losses occur.
B correct: supernormal profit attracts new firms, increasing supply and reducing price.
C wrong: government price fixing is not the standard perfect competition adjustment.
D wrong: reducing output to zero is not the mechanism.

19. Answer: B

A wrong: entry would worsen losses by increasing supply and reducing price.
B correct: losses cause some firms to leave, reducing supply and raising price.
C wrong: individual firms cannot raise price independently.
D wrong: product differentiation is not perfect competition.

20. Answer: A

A correct: entry increases the number of suppliers, shifting market supply right and lowering price.
B wrong: exit shifts supply left.
C wrong: supply changes.
D wrong: supply does not become perfectly inelastic.

21. Answer: B

A wrong: entry shifts supply right.
B correct: exit reduces market supply, shifting supply left and raising price.
C wrong: supply does not become infinite.
D wrong: demand is not eliminated.

22. Answer: B

A wrong: supernormal profit is competed away.
B correct: long-run perfect competition leads to normal profit only.
C wrong: losses cause exit until price rises.
D wrong: monopoly profit is not possible with free entry.

23. Answer: A

A correct: long-run equilibrium occurs where P = MR = MC = AC at minimum AC.
B wrong: P > MC would be allocative inefficiency.
C wrong: MR = 0 is revenue maximisation.
D wrong: P < AVC cannot continue.

24. Answer: B

A wrong: high price does not prove productive efficiency.
B correct: productive efficiency means producing at minimum average cost.
C wrong: total revenue maximisation is where MR = 0.
D wrong: marginal revenue zero is not productive efficiency.

25. Answer: A

A correct: allocative efficiency occurs where price equals marginal cost.
B wrong: P > MC means underproduction from society’s viewpoint.
C wrong: MC = AC shows minimum AC, not allocative efficiency by itself.
D wrong: AR = AVC is not an efficiency condition.

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.

26. Answer: A

A correct: P $18 is above AC $14, so firms earn supernormal profit; entry raises supply and lowers price.
B wrong: firms leave when losses occur, not supernormal profit.
C wrong: free entry removes permanent supernormal profit.
D wrong: perfect competition does not become monopoly through normal adjustment.

27. Answer: B

A wrong: entry occurs with supernormal profit, not losses.
B correct: price $8 is below AC $10, so firms leave; market supply falls and price rises.
C wrong: firms are making losses.
D wrong: the firm’s demand is perfectly elastic, not the whole market demand.

28. Answer: A

A correct: if P ≥ AVC, the firm covers variable costs and contributes to fixed costs, so it may continue in the short run.
B wrong: P below AVC means shutdown.
C wrong: price does not need to equal total fixed cost.
D wrong: zero price would not cover variable costs.

29. Answer: A

A correct: the short-run shutdown point is where price equals minimum AVC.
B wrong: AC maximum is irrelevant.
C wrong: MR = 0 is revenue maximisation.
D wrong: AFC and MC maximum are not shutdown rules.

30. Answer: B

A wrong: if price is below AVC, producing increases losses beyond fixed costs.
B correct: the firm should shut down in the short run because it cannot cover variable costs.
C wrong: MR = 0 is revenue maximisation, not shutdown logic.
D wrong: entering the industry is irrational at a loss.

31. Answer: B

A wrong: if P > AVC, the firm should continue in the short run.
B correct: the firm makes a loss because P < AC, but it covers variable costs and some fixed costs.
C wrong: supernormal profit requires P > AC.
D wrong: in the long run it may exit, but in the short run it can continue.

32. Answer: B

A wrong: price below AC means loss, but not automatic short-run shutdown.
B correct: P $10 is above AVC $7, so the firm continues in the short run.
C wrong: P is below AC, so no supernormal profit.
D wrong: a perfectly competitive firm cannot raise price independently.

33. Answer: B

A wrong: price does not cover AVC.
B correct: P $6 is below AVC $8, so the firm should shut down in the short run.
C wrong: normal profit requires P = AC.
D wrong: the firm cannot choose price equal to AC in perfect competition.

34. Answer: A

A correct: the short-run supply curve of a competitive firm is the MC curve above minimum AVC.
B wrong: AC curve is not the supply curve.
C wrong: MR is horizontal at price.
D wrong: demand curve is not the firm’s supply curve.

35. Answer: A

A correct: in the long run, industry supply changes through firms entering or leaving.
B wrong: price leadership is oligopoly behaviour.
C wrong: collusion is not perfect competition.
D wrong: advertising is limited due to homogeneous products.

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.

36. Answer: A

A correct: perfect knowledge means buyers and sellers know prices, quality and market conditions.
B wrong: secret technology suggests imperfect information.
C wrong: inability to compare products violates perfect knowledge.
D wrong: worker immobility violates factor mobility.

37. Answer: A

A correct: perfect mobility means resources can move freely between firms and uses.
B wrong: consumers can switch suppliers easily.
C wrong: firms can enter and leave freely.
D wrong: workers are not permanently fixed.

38. Answer: A

A correct: homogeneous products are identical from the consumer’s point of view.
B wrong: unique products are differentiated.
C wrong: branding creates market power, not homogeneity.
D wrong: advertising is less important for identical goods.

39. Answer: A

A correct: with identical products and a perfectly elastic demand curve, advertising by one firm gives little benefit.
B wrong: the firm does not control price.
C wrong: advertising does not make demand perfectly inelastic.
D wrong: monopoly profit is not permanent in perfect competition.

40. Answer: C

A wrong: many small firms support perfect competition.
B wrong: free entry and exit support perfect competition.
C correct: strong brand loyalty creates product differentiation and market power.
D wrong: identical products support perfect competition.

41. Answer: B

A wrong: each farmer has little or no price-setting power.
B correct: each farmer is tiny relative to the market, so each is a price taker.
C wrong: wheat is usually homogeneous.
D wrong: entry is not completely impossible.

42. Answer: C

A wrong: foreign exchange has many buyers and sellers and can be highly competitive.
B wrong: agriculture with many small producers can be close to perfect competition.
C correct: branded smartphones are differentiated and produced by firms with market power.
D wrong: identical digital currency units are homogeneous.

43. Answer: A

A correct: supernormal profit is shown by (price – AC) × output.
B wrong: AC above price shows loss.
C wrong: fixed cost alone is not profit.
D wrong: gap between AVC and AFC is not profit.

44. Answer: B

A wrong: price above AC shows profit.
B correct: loss is shown by (AC – price) × output.
C wrong: price × marginal cost has no loss meaning.
D wrong: output divided by fixed cost is meaningless here.

45. Answer: A

A correct: profit per unit = $15 – $11 = $4; total profit = $4 × 100 = $400.
B wrong: $1100 is total cost.
C wrong: $1500 is total revenue.
D wrong: $2600 adds revenue and cost incorrectly.

46. Answer: C

A wrong: $3 is loss per unit.
B wrong: 80 is output.
C correct: loss per unit = $12 – $9 = $3; total loss = 80 × $3 = $240.
D wrong: $960 is total cost.

47. Answer: B

A wrong: P $20 is below AC $25, so no supernormal profit.
B correct: the firm makes a loss but continues because P $20 is above AVC $14.
C wrong: shutdown occurs only if P < AVC.
D wrong: normal profit requires P = AC.

48. Answer: B

A wrong: price $10 does not cover AVC $12.
B correct: the firm should shut down because price is below AVC.
C wrong: normal profit requires P = AC.
D wrong: supernormal profit requires P > AC.

49. Answer: A

A correct: supernormal profit attracts entry, increasing supply, reducing price and removing supernormal profit.
B wrong: supernormal profit causes entry, not exit.
C wrong: losses cause exit, not entry.
D wrong: normal profit does not cause endless entry because there is no supernormal return.

50. Answer: A

A correct: free entry and exit remove abnormal profit/loss and lead to P = MC and production at minimum AC.
B wrong: barriers to entry prevent perfect competition and P > MC is allocative inefficiency.
C wrong: product differentiation is not perfect competition.
D wrong: price leadership and collusion are oligopoly features.

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.