Multiple-Choice Questions
1. The main reason that firms in perfect competition make no profit in the long run is that
A. In the long run, firms lose competitiveness.
B. In the long run, costs rise faster than prices.
C. If there is profit, new firms will be attracted to join the industry and profit will be
competed away.
D. In the long run, some firm exit the industry and are replaced.
2. If a firm has no ability to decide on the price of its product, it
A. Is a price maker.
B. Is a monopolistically competitive firm.
C. Cannot maximise profit.
D. Faces a horizontal individual demand curve.
3. For all perfectly competitive firms,
A. Demand is perfectly inelastic.
B. Only economic profits are earned.
C. Market demand is horizontal.
D. Price always equals marginal revenue.
4. Suppose that in a perfectly competitive market, firms are making economic profits. What
will happen in the long run?
A. Some firms will leave.
B. The market price will rise.
C. Economic profits will be driven to zero.
D. Market supply shift to the left.
5. Consider a firm operating with the following: price=RM20; MR=RM20; MC=20;
ATC=RM20. We can conclude that the firm is
A. Making an economic profit of RM20.
B. Will exit the industry in the long run.
C. Perfectly competitive in the long-run equilibrium.
D. None of the above.
6. If a profit-maximising firm in a perfectly competitive industry is producing at a quantity
with a marginal of RM28, what is the good’s selling price?
A. RM56.
B. More than RM28.
C. Less than RM28.
D. RM28
7. Firms in perfectly competitive market can earn economic profit
A. Only in the long run.
B. In both short run and long run.
C. Only in the short run.
D. Only if the firm is efficient.

8. Which of the following is NOT a characteristic of a perfectly competitive market
structure?
A. The firm is a price taker.
B. The firm is a profit maximiser.
C. The market demand is downward sloping.
D. The firm can earn an economic profit in the long run.
9. If new firms enter an industry,
A. The market supply curve will shift to the left, market price will fall and industry output
will increase.
B. The market supply curve will shift to the right, market price will fall, and industry output
will increase.
C. The market demand curve will shift to the right, market price will rise, and industry output
will increase.
D. The market supply will shift to the right, product price will increase, and market output
will decrease.
10. A perfectly competitive firm sells its output for RM120 per unit, and the minimum
average variable cost is RM150 per unit. The firm should
A. Increase output.
B. Maintain its current rate of output.
C. Shut down.
D. Decrease output, but no shut down.