The Theory of the Firm Under Perfect Competition — Practice Quiz

Price equals marginal cost, Marginal cost curve is rising, Price is greater than average variable cost (short run)

For profit maximization, three conditions must be met: (1) P = MC for optimal output level, (2) MC must be rising to ensure it's a maximum not minimum, and (3) P ≥ AVC in short run to cover variable costs. The other options are not necessary conditions for profit maximization.

Minimum point of average variable cost curve

In the short run, a firm will shut down if price falls below the minimum average variable cost. At this point, the firm cannot even cover its variable costs, so it's better to shut down and only lose fixed costs rather than lose both fixed and variable costs.

Price is less than long run average cost

In the long run, all costs are variable. A firm will exit if it cannot cover its long run average costs, as it would be making losses and has no fixed costs tying it to production in the long run.

Technological progress, Change in input prices, Imposition of unit tax

Supply curve shifts are caused by factors that affect production costs: technological progress reduces costs (rightward shift), higher input prices increase costs (leftward shift), and unit taxes increase costs (leftward shift). Changes in market demand or number of consumers affect demand, not supply.