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CBSE Questions for Class 11 Commerce Economics The Theory Of The Firm Under Perfect Competition Quiz 8 - MCQExams.com
CBSE
Class 11 Commerce Economics
The Theory Of The Firm Under Perfect Competition
Quiz 8
A firm reaches shut-down point when:
Report Question
0%
$$AR = AVC$$
0%
$$TR = TC$$
0%
$$TC = AVC$$
0%
$$MC = AC$$
Explanation
A firm reaches shut-down point when: AR=AVC.
When a firm is able to cover its variable costs only, it will be at shut-down point. At shut-down point, the firm no longer gets benefits from its operations.
In case of break-even point, a firm covers:
Report Question
0%
variable cost only
0%
fixed cost only
0%
both fixed costs and variable costs
0%
none of the above
Explanation
At break-even point, a firm makes normal profits. At this point, total revenue and total cost are equal. Total costs include both fixed costs and variable costs.
Profits are said to be normal when TR=TC or AR=AC. Normal profits are defined as the minimum return that the producer expects from his capital invested in the business. Normal profits are a part of total cost.
In case of perfect competition, products of all firms in the industry are ________.
Report Question
0%
close substitutes of each other
0%
close substitutes supported with advertisement
0%
differentiated products supported with advertisement
0%
perfect substitutes of each other
Explanation
In case of perfect competition, products of all firms in the industry are perfect substitutes of each other, that means the goods of the perfectly competitive market are identical.
Perfect competition is a form of the market in which there is a large number of buyers and sellers and where homogeneous product is sold at a uniform price.
Firm's demand curve under perfect competition is a horizontal straight line parallel to X-axis.
Under perfect competition, AR is constant for a firm. Hence, AR = MR.
Shut-down point occurs when a firm is just covering its fixed costs only.
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0%
True
0%
False
Explanation
Shut-down point occurs when a firm is just covering its variable costs only. Or, it is a situation when: $$TR = TVC$$ or $$AR = AVC$$.
The slope of a tangent to any point on the total revenue curve shows ________.
Report Question
0%
marginal revenue
0%
average revenue
0%
price per unit
0%
none of the above
Explanation
The slope of a tangent to any point on the total revenue curve shows marginal revenue. Marginal revenue is the rate of the total revenue..
Marginal revenue is the change in total revenue when one more unit of a commodity is sold.
MR= change in TR/change in quantity sold
Normal profit means _____________.
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0%
the profit made by the marginal entrepreneur in a normal year
0%
the payment made to the marginal entrepreneur for his abilities
0%
the surplus profit made by the least efficient firms
0%
the payment needed to keep an entrepreneur in an industry
Explanation
Normal profit means the payment needed to keep an entrepreneur in an industry.
Profits are said to be normal when TR=TC or AR=AC. Normal profits are defined as the minimum return that the producer expects from his capital invested in the business. Normal profits are a part of total cost.
A perfectly competitive firm will always expand output as long as __________.
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0%
rising marginal cost is less than price
0%
rising marginal cost is less than the marginal revenue
0%
rising marginal cost is less than the average cost
0%
none of the above
Explanation
A perfectly competitive firm will always expand output as long as rising marginal cost is less than the price as the firm will achieve its profit maximization point when MC=AR.
One would expect a firm to close down rather than continue producing in the short-period if ___________.
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0%
total revenue were more than total variable cost
0%
total revenue were less than total variable cost
0%
variable costs were to fall below fixed costs
0%
variable costs were to rise above fixed costs
Explanation
One would expect a firm to close down rather than continue producing in the short-period if total revenue were less than the total variable cost. This means in short period firm should discontinue its production if TR<TVC.
In all forms of imperfect competition, the average revenue curve facing the individual slopes ___________.
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0%
upward
0%
downward
0%
horizontally
0%
vertically
Explanation
In all forms of imperfect competition, the average revenue curve facing the individual slopes downward.
When AR is decreasing, MR should be decreasing faster than AR. Thus, downward sloping MR curve is below the downward sloping AR curve(a situation of monopoly and monopolistic competition)
At the shut-down point, ____________.
Report Question
0%
P=AVC
0%
TR=TVC
0%
The total losses of the firm equal TFC
0%
all of the above
Explanation
A firm reaches shut-down point when:
A)P=AVC,
B)TR=TVC
C) total losses of the firm equal TFC..
When a firm is able to cover its variable costs only, it will be at shut-down point. At shut-down point, the firm no longer gets benefits from its operations.
If more firms enter a competitive industry the theory predicts that ________.
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0%
both marginal and average cost curves rises
0%
the industry short-run supply curves shift upwards to the right
0%
output of every firm increases
0%
the price of the product rises
For a perfectly competitive firm, there are only normal profits in the long run.
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0%
True
0%
False
Explanation
True.
Under perfect competition, only normal profits prevail in the long run because of freedom of
entry and exit of the firms in the market.
"I am making a loss, but with the rent I have to pay, I can't afford to shutdown at this point of time." If this entrepreneur is attempting to maximize profits or minimize losses, his behaviour in the short run is _____________.
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0%
rational, if the firm is covering its variable cost
0%
rational, if the firm is covering its fixed costs
0%
irrational, since plant closing is necessary to eliminate losses
0%
irrational, since fixed costs are eliminated of a firm shuts down
Under perfect market and in case of decreasing marginal cost the firm's equilibrium with respect to level of production _________.
Report Question
0%
cannot be achieved
0%
can be achieved after a small level of output
0%
can be achieved after a high level of output
0%
will result in run-away inflation
Which is the best definition of the marginal firm?
Report Question
0%
The firm with the largest profit.
0%
The firm with the lowest costs.
0%
The firm which makes only normal profit.
0%
The firm which equates its marginal cost with marginal revenue.
Explanation
Marginal firm is the firm which makes only normal profit and at its equilibrium equates, AR = AC.
In the short-run, a firm would remain in business as long as which one of the following costs is covered?
Report Question
0%
Total costs
0%
Fixed costs
0%
Variable costs
0%
Constant costs
Explanation
In short-run, the firm would like to cover variable costs and in long run firm would like to cover total costs to remain operational.
Vivaan decided to join a NCC camp this year which required an entry fee of $$Rs. 1,500$$ during the summer vacation by not opting for usual part time job which he used to do in other years and earn $$Rs. 5,000$$. What will be the opportunity cost in this case?
Report Question
0%
$$Rs. 1,500$$
0%
$$Rs. 5,000$$
0%
$$Rs. 6,500$$
0%
Can't be determined
Explanation
The opportunity cost of production of a commodity refers to
the cost which the producer has to sacrifice in terms
of the next best alternative which could be produced out of that cost in order to produce every unit of the given commodity.
In the above situation,
Viaan has to pay Rs. 1,500 in addition to Rs. 5,000 which he lost by not opting for the job to join the camp, so the total cost is Rs. 6,500.
Hence, C is the correct option.
If the market price drops from Rs. 100 to Rs. 56, the firm's short run response should be to:
Report Question
0%
Shut down
0%
Produce 5 units
0%
Produce 20 units
0%
Continue to produce the same number of units as before the drop in price
Explanation
If market price is 56 (i.e., $$P = AR = MR$$) and MC is 56 at the output of 20 units, $$MC = MR$$.
Quantity
(Q)
Variable cost
(VC)
Fixed cost
(FC)
Total cost
(TC)
Average variable
cost (AVC)
Average total
cost (ATC)
Marginal cost
(MC)
0
0
300
300
-
-
-
5
250
300
550
50
110
50
10
470
300
770
47
77
44
15
700
300
1000
46.67
66.67
46
20
980
300
1280
49
64
56
25
1350
300
1650
54
66
74
30
1850
300
2150
61.67
71.67
100
35
2520
300
2820
72
80.57
134
40
3400
300
3700
85
92.5
176
45
4530
300
4830
100.67
107.33
226
50
5950
300
6250
119
125
284
An entrepreneur will stay in business in the long run as long as he meets:
Report Question
0%
His domestic expenditure
0%
All costs of production
0%
Fixed costs of production
0%
Variable costs of production
Explanation
An entrepreneur would like to cover all costs (fixed and variable costs) in the long run.
In a situation of perfectly elastic supply, price of the commodity tends to remain constant, no matter demand increases or decreases.
Report Question
0%
True
0%
False
Explanation
True.
The price will remain unchanged under a perfectly elastic supply curve, no matter demand increases or decreases. This is because supply responds proportionately to the increase or decrease in demand, i.e., it only changes on the quantity axis, while, it is static on the price axis at a given price.
To maximize profit, the firm should produce ________.
Report Question
0%
15 units
0%
30 units
0%
35 units
0%
50 units
Explanation
Market price is Rs. 100 (i.e., P = AR = MR) and in the table MC is Rs. 100 at quantity 30. So to maximinse profits the firm should produce 30 units at which MC = MR, i.e., Rs. 100.
Quantity
(Q)
Variable cost
(VC)
Fixed cost
(FC)
Total cost
(TC)
Average variable
cost (AVC)
Average total
cost (ATC)
Marginal cost
(MC)
0
0
300
300
-
-
-
5
250
300
550
50
110
50
10
470
300
770
47
77
44
15
700
300
1000
46.67
66.67
46
20
980
300
1280
49
64
56
25
1350
300
1650
54
66
74
30
1850
300
2150
61.67
71.67
100
35
2520
300
2820
72
80.57
134
40
3400
300
3700
85
92.5
176
45
4530
300
4830
100.67
107.33
226
50
5950
300
6250
119
125
284
Which of the following is correct?
Report Question
0%
If marginal revenue is positive and falling, total revenue will rise at a decreasing rate.
0%
Total revenue is equal to price times the quantity sold.
0%
Under perfect competition, total revenue is equal to marginal revenue times the quantity sold.
0%
All of the above
State whether the following statement is True or False:
Supply of perishable goods is inelasitc.
Report Question
0%
True
0%
False
Explanation
Supply of perishable goods is inelastic because the supply of perishable goods cannot be increased or decreased easily. As a result, change in demand for these goods will not result a change in their supply.
To maximize its profit, the firm should produce:
Report Question
0%
0 units
0%
3 units
0%
5 units
0%
7 units
Explanation
The firm earns maximum profit at the level of production where $$MR = MC$$. At the level of production of 7 units, marginal revenue $$=$$ marginal cost $$= 52$$.
Production
(Q)
Price per unit
(P)
Total Cost
(TC)
Marginal cost
(MC)
Total revenue
(TR)
0
130
45
-
0
1
124
88
43
124
2
118
125
37
236
3
112
159
34
336
4
106
193
34
424
5
100
230
37
500
6
94
273
43
564
7
88
325
52
616
8
82
389
64
656
9
76
465
76
684
$$Formulas:$$
TR $$= P \times Q$$
MC $$= TC_{n} - TC_{n-1}$$
MR $$= TR_{n} - TR_{n-1}$$
Qty
AFC
ATC
MC
0
-
-
-
1
80.00
100.00
20
2
40.00
58.00
17
3
26.66
44.00
15
4
20.00
36.25
13
5
16.00
31.40
12
6
13.33
28.33
13
7
11.42
26.29
14
8
10.00
26.13
25
9
8.88
26.56
30
10
8.00
27.56
34
11
7.27
28.30
40
12
6.66
30.00
47
13
6.15
31.92
55
If the market price is Rs. 31, the firm will produce:
Report Question
0%
9 units at an economic profit of Rs. 40
0%
10 units at an economic profit of Rs. 67
0%
9 units at an economic profit of Rs. 81
0%
Zero units of output and lose its fixed cost in the short run
Explanation
At the level of production of 9 units, MC is 30 whereas MR is 31 and a perfectly competitive firm can produce at a level of output where MC $$=$$ MR. MC can be less than MR, but not more than MR.
At 9 units,
TR $$= 9 \times 31 = 279$$
TC $$= 9 \times 26.56 = 239$$
Profit/Loss $$=$$ TR-TC $$= 279 - 239 = Rs.40$$ (profit)
When production equals 5 units, the firm's total revenue is :
Report Question
0%
Rs. 100
0%
Rs. 270
0%
Rs. 324
0%
Rs. 500
Explanation
Production
(Q)
Price per unit
(P)
Total Cost
(TC)
Marginal cost
(MC)
Total revenue
(TR)
0
130
45
-
0
1
124
88
43
124
2
118
125
37
236
3
112
159
34
336
4
106
193
34
424
5
100
230
37
500
6
94
273
43
564
7
88
325
52
616
8
82
389
64
656
9
76
465
76
684
$$Formulas:$$
TR $$= P \times Q$$
MC $$= TC_{n} - TC_{n-1}$$
MR $$= TR_{n} - TR_{n-1}$$
When production equals 4 units, the firm's MR is ________.
Report Question
0%
72
0%
100
0%
88
0%
76
Explanation
Production
(Q)
Price per unit
(P)
Total Cost
(TC)
Marginal cost
(MC)
Total revenue
(TR)
0
130
45
-
0
1
124
88
43
124
2
118
125
37
236
3
112
159
34
336
4
106
193
34
424
5
100
230
37
500
6
94
273
43
564
7
88
325
52
616
8
82
389
64
656
9
76
465
76
684
$$Formulas:$$
TR $$= P \times Q$$
MC $$= TC_{n} - TC_{n-1}$$
MR $$= TR_{n} - TR_{n-1}$$
Qty
AFC
ATC
MC
0
-
-
-
1
80.00
100.00
20
2
40.00
58.00
17
3
26.66
44.00
15
4
20.00
36.25
13
5
16.00
31.40
12
6
13.33
28.33
13
7
11.42
26.29
14
8
10.00
26.13
25
9
8.88
26.56
30
10
8.00
27.56
34
11
7.27
28.30
40
12
6.66
30.00
47
13
6.15
31.92
55
If the price of the good is Rs. 13, the firm will produce ____.
Report Question
0%
4 units at a loss of Rs. 93
0%
6 units at a loss of Rs. 92
0%
zero units at a loss of Rs. 80
0%
8 units at a loss of Rs. 9
Explanation
Firm can either produce 4 units or 6 units, at which $$MC =MR$$. However, the firm will also consider that $$P \ge AVC. $$
AVC at 4 units is $$36.25 -20 = 16.25$$ and at 6 units is $$28.33 - 13.33 = 15$$.
Thus, $$AVC > P$$ at both 4 units as well as 6 units.
Hence, it would be better for the firm to produce zero output and incur losses of fixed cost only, i.e., $$Rs. 80.$$
Qty
AFC
ATC
MC
0
-
-
-
1
80.00
100.00
20
2
40.00
58.00
17
3
26.66
44.00
15
4
20.00
36.25
13
5
16.00
31.40
12
6
13.33
28.33
13
7
11.42
26.29
14
8
10.00
26.13
25
9
8.88
26.56
30
10
8.00
27.56
34
11
7.27
28.30
40
12
6.66
30.00
47
13
6.15
31.92
55
If price is Rs. 34, the perfectly competitive firm will:
Report Question
0%
Shut down
0%
Produce 10 units
0%
Produce 11 units
0%
Produce 13 units
Explanation
At the level of production of 10 units, MC is 34 as well at the price of Rs. 34, the MR will be 34, and a perfectly competitive firm can produce at a level of output where MC
=
=
MR. Thus, it will produce 10 units.
Supply curve will shift when ____________.
Report Question
0%
Price falls
0%
Price rises
0%
Demand shots
0%
Technology changes
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