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The Theory of the Firm under Perfect Competition (12 Economics)

Practise chapter-wise MCQs for Class 12 Economics — The Theory of the Firm under Perfect Competition. Every question comes with the correct answer and an e

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TL;DR: Practise chapter-wise MCQs for Class 12 Economics — The Theory of the Firm under Perfect Competition. Every question comes with the correct answer and…

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Practise chapter-wise MCQs for Class 12 Economics — The Theory of the Firm under Perfect Competition. Every question comes with the correct answer and an e

The Theory of the Firm under Perfect Competition MCQs with Answers & Explanations

Q1. The total revenue (TR) for a perfectly competitive firm is calculated as:

  1. Price (P) * Quantity (Q) ✓ (correct)
  2. Average Variable Cost (AVC) * Quantity (Q)
  3. Price (P) / Quantity (Q)
  4. Marginal Cost (MC) * Quantity (Q)

Explanation: Total Revenue is the total income a firm generates from selling its goods or services, which is the price per unit multiplied by the number of units sold.

Q2. The law of diminishing marginal returns implies that as a firm increases its variable input, holding fixed inputs constant:

  1. Total product will eventually decrease
  2. Marginal product will eventually decrease ✓ (correct)
  3. Average product will eventually decrease
  4. All of the above

Explanation: The law of diminishing marginal returns specifically states that the additional output from each additional unit of the variable input will eventually fall.

Q3. Which of the following represents the short-run supply curve of a perfectly competitive firm?

  1. Its average total cost curve above marginal cost
  2. Its marginal cost curve above average variable cost ✓ (correct)
  3. Its average variable cost curve above marginal cost
  4. Its marginal cost curve above average total cost

Explanation: The firm's short-run supply curve is that portion of its marginal cost curve which lies above the minimum point of its average variable cost curve.

Q4. Which of the following is NOT a characteristic of a perfectly competitive market?

  1. Homogeneous products
  2. Free entry and exit
  3. Imperfect information ✓ (correct)
  4. Large number of buyers and sellers

Explanation: Perfect competition assumes perfect information, meaning buyers and sellers are fully aware of prices and product qualities.

Q5. In the long-run equilibrium of a perfectly competitive market, firms earn:

  1. Economic losses
  2. Zero revenue
  3. Supernormal profits
  4. Normal profits ✓ (correct)

Explanation: In long-run equilibrium, free entry and exit ensure that firms earn only normal profits (zero economic profit), where price equals minimum average total cost.

Q6. In a perfectly competitive market, a firm's demand curve is:

  1. Perfectly elastic (horizontal) ✓ (correct)
  2. Perfectly inelastic (vertical)
  3. Upward sloping
  4. Downward sloping

Explanation: In perfect competition, a firm is a price taker. It can sell any quantity at the market determined price, making its demand curve perfectly elastic at that price.

Q7. A firm operating in perfect competition will maximize its profit where:

  1. Marginal Revenue (MR) > Marginal Cost (MC)
  2. Marginal Revenue (MR) = Marginal Cost (MC) ✓ (correct)
  3. Marginal Revenue (MR) < Marginal Cost (MC)
  4. Average Cost (AC) is minimized

Explanation: Profit maximization in perfect competition occurs at the output level where MR equals MC. If MR > MC, the firm can increase profit by producing more. If MR < MC, it can increase profit by producing less.

Q8. In the short run, a perfectly competitive firm will shut down if the market price is:

  1. Below average total cost
  2. Above average total cost
  3. Below average variable cost ✓ (correct)
  4. Above average variable cost

Explanation: A firm will continue to produce in the short run as long as the price covers its average variable cost. If the price falls below AVC, the firm incurs losses greater than its fixed costs and is better off shutting down.

Q9. If the market price in a perfectly competitive industry is above the average total cost for firms in the long run, we can expect:

  1. Firms to exit the industry
  2. Existing firms to increase prices
  3. Existing firms to reduce output
  4. New firms to enter the industry ✓ (correct)

Explanation: Economic profits (price above ATC) in the long run signal opportunities for new firms to enter the industry, increasing supply and driving down prices towards the minimum ATC.

Q10. For a perfectly competitive firm, Marginal Revenue (MR) is equal to:

  1. Price (P) ✓ (correct)
  2. Marginal Cost (MC)
  3. Average Total Cost (ATC)
  4. Average Variable Cost (AVC)

Explanation: In perfect competition, the firm is a price taker, so it receives the same price for each unit sold. Therefore, MR is always equal to the market price.

More 12 Economics MCQs

  • Introduction to Microeconomics
  • Theory of Consumer Behaviour
  • Production and Costs
  • Market Equilibrium
  • Non-competitive Markets
  • Introduction to Macroeconomics

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