Catch the false claim about price takers

Exercise and reference answers

Questions

1. False statement

   A perfectly competitive firm sets the market price for its own output.

   Statements

   1. Many firms in perfect competition sell identical products.
   2. A perfectly competitive firm sets the market price for its own output.
   3. Firms can enter and leave the market without any restrictions.

2. False statement

   A price taker faces a downward sloping demand curve of its own.

   Statements

   1. For a price taker, marginal revenue is equal to the market price.
   2. Profit is highest where marginal revenue equals marginal cost.
   3. A price taker faces a downward sloping demand curve of its own.

3. False statement

   Fixed costs disappear the moment a firm stops producing.

   Statements

   1. Fixed costs disappear the moment a firm stops producing.
   2. A firm shuts down when price falls below average variable cost.
   3. Losses can be smaller than fixed costs if the firm keeps producing.

4. False statement

   A competitive firm can raise its price by a penny and keep all its sales.

   Statements

   1. The market price comes from supply and demand across the whole market.
   2. A competitive firm can raise its price by a penny and keep all its sales.
   3. A perfectly competitive firm is a very small player in its own market.

5. False statement

   Entry stops only once the market price climbs above average cost.

   Statements

   1. In long run equilibrium economic profits are driven down to zero.
   2. Exit of firms shifts the market supply curve to the left.
   3. Entry stops only once the market price climbs above average cost.

Instructions

Tap the one statement in each set of three that does not hold.

Explanation