UNIVERSITY OF PROFESSIONAL STUDIES, ACCRA (UPSA)

DEPARTMENT OF BANKING AND FINANCE

2021/2022 ACADEMIC YEAR, SECOND SEMESTER
BCPC 118: ECONOMICS FOR BUSINESS, LEVEL 100

Review/Trial Questions on Perfect Competition

1. Using diagrams, explain why a perfectly competitive firm will continue to operate
even though price is less than average cost. Also, indicate in your explanation the
point at which the firm will shut down.
2. In the short run, a perfectly competitive firm can make zero economic profit,
abnormal profit or loss. However, in the long run, firms are expected to make zero
economic profit. What assumption under perfect competition leads to this long run
result? Explain how this condition leads to the transition from the various short run
profit outcomes to the long run outcome.
3. The perfectly competitive firm has a perfectly elastic demand curve. Is this statement
true or false? Explain your answer.
4. The perfectly competitive firm should always produce the output level for which price
equals marginal cost. True or false. Explain.
5. A price-taking firm makes air conditioners. The market price of one of its new air
conditioners is $120. The firm’s total cost information is given in the table below:

Air Conditioners per Total Cost ($ per

day day)
1 100
2 150
3 220
4 310
5 405
6 510
7 650
8 800

a. Find the Average Cost, Marginal Cost, Total Revenue and Profit at each
output level.
b. How many air conditioners should the firm produce per day if its goal is to
maximize its profit?

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6. Paducah Slugger Company makes baseball bats out of lumber supplied to it by Acme
Sporting Goods, which pays Paducah $10 for each finished bat. Paducah’s only
factors of production are lathe operators and a small building with a lathe. The
number of bats it produces per day depends on the number of employee-hours per
day, as shown in the table below.

Number of bats per Number of Employee hours per

day day
0 0
5 1
10 2
15 4
20 7
25 11
30 16
35 22

a. If the wage is $15 per hour and Paducah’s daily fixed cost for the lathe and
building is $60, what is the profit-maximizing quantity of bats?
b. What would be the profit-maximizing number of bats if the firm’s fixed cost
were not $60 per day but only $30?