Test Prep For AP® Courses


Why will a perfectly competitive firm stay in a market, that is, choose not to exit, even if its economic profits are zero?

  1. Because the price it charges is not equal to zero, the firm still makes money.
  2. Demand elasticity for its product is greater than unity.
  3. The firm still makes accounting profits.
  4. As long as demand for the firm’s product exists, it stays in the market.
  5. It is not yet operating on the rising portion of its marginal cost curve.

In the long run, a perfectly competitive firm’s price will be equal to all of the following EXCEPT ____________.

  1. marginal cost
  2. marginal revenue
  3. minimum of average total cost
  4. minimum of average variable cost
  5. average revenue

A firm in perfect competition is currently making losses in the short run but has not yet shut down.

  1. Draw a graph in which marginal cost, marginal revenue, average variable cost, and average total cost curves are shown that describes this firm in short-run equilibrium earning losses. Indicate the price and quantity sold by this firm on your graph.
  2. Indicate the area of loss incurred by this firm on your graph.
  3. In one to two sentences, describe the process that will bring this market into long-run equilibrium.
  4. In your graph, illustrate the effects on equilibrium price caused by the process you described in part (c).