ECON Chapter 13

The Profit maximizing level of output of 15 units, a perfectly competitive firm's marginal revenue is $6 average variable cost is $1.70, Average total cost is $7.22 and marginal cost is $5.95. This firms economic profit or loss equals:

$-18.30

at a profit-maximizing level of output of 25 units, a perfectly competitive firm's marginal revenue is $4, average variable cost is $.30, average total cost is $1.22 and marginal cost is $3.75. The firm's economic profit equals:

$69.50 in a perfectly competitive market, price is equal to marginal revenue.

if the equilibrium price in a perfectly competitive market equals $4, then the marginal revenue for an individual firm will be _______ when they are producing 100 units of a good.

4

to determine maximum profit, first determine the quantity where MR = MC and then subtract price minus ______ and multiply.

ATC

An assumption of a competitive market is that both buyers and sellers are price takers. When we go to the mall to shop for clothing or to the grocery to buy food, what do we usually observe?

Buyers are often price takers, but sellers are usually price makers. Buyers face fixed prices and decide whether to buy. Sellers very often have some control over the price.

A firm operating in a perfectly competitive market is a price taker because it

Cannot change market price, it can only adjust to it

Marginal revenue is the _________ in total revenue that associated with changes in ________

Change, quantity

eBay.com is a vast auction site that is similar to a competitive market in some ways but differs from it in others. Which of the following describes how eBay resembles a competitive market?

It is easy to enter and easy to leave eBay. Competitive markets assume no barriers to entry, and there are few or none with eBay.

A firm within perfect competition Will produce up until the point where marginal revenue equals marginal cost because

It will experience the lowest possible losses at this point and it will experience the highest possible profit at this point

the change in total cost associated with a change in quantity is

Marginal cost

Perfectly competitive firms profit is ______ when total revenue exceed total cost by the maximum amount

Maximized

Which of the following best describes the concept of price taker

One of a large number of firms producing the same identical product as every firm in its industry and only providing a small part of market supply

a ________ _________ market is a market where the economic forces operating unimpeded

Perfectly, competitive

_____ competition is considered to be rare in the real world.

Pure

In a perfectly competitive decreasing-cost industry, a decrease in market demand in the long run causes:

a decrease in quantity, an increase in price, and no change in profit. In a decreasing-cost industry, long-run market supply is downward-sloping.

barriers to entry

are social, political, or economic impediments that prevent firms from entering a market.

A perfectly competitive firm facing a price of $50 decides to produce 500 widgets. Its marginal cost of producing the last widget is $50. If the firm's goal is maximize profit, it should:

continue producing 500 widgets. Since price equals marginal cost, the firm maximizes its profits by producing and selling 500 widgets.

Suppose the dry cleaning industry is initially in long-run equilibrium but then experiences a sharp increase in the price of its inputs. Assuming that the industry is perfectly competitive, the increase in costs should:

decrease the number of firms in the industry in the long run and raise the market price. The increase in input prices will create losses within the industry, which will cause some firms to exit. As these firms leave the industry, supply will contract and prices will increase.

an unfavorable shift or ______ in demand will upset the original industry equilibrium and produce _______ leading to firms exiting the market.

decrease; losses

firms will not enter an industry when marginal revenue, marginal cost, price and average total cost are equal because:

economic profit is zero and existing firms are earning only normal profits

as more firms ______ a market the market supply curve shifts to the ______ because more firms are Producing the product which leads to a ______ in the equilibrium price.

enter; right; decline

whenever price is ______ than average variable costs but is ______ than average total costs, the firm can pay all of its _____ costs and therefore keeps operating.

greater; less; variable

Each perfectly competitive firm's demand curve is perfectly ______ at the equilibrium price.

horizontal

if market price initially exceeds minimum average total cost, the resulting economic profits will attract new firms to the industry eventually resulting in

industry expansion that increases supply until price equals minimum average total cost ATC

when looking at a graph, how is the profit-maximizing output determined?

it is determined where MR = MC

The _______ supply curve is a schedule of quantities supplied when firms are no longer entering or exiting the market.

long-run market

for a perfectly competitive firm that is producing at the profit-maximizing condition quantity, _____ cost is equal to ______ which is equal to marginal ______

marginal; price; revenue

If market demand increases in a perfectly competitive increasing-cost industry:

new firms will enter the industry, factor prices will rise, and the price at which each firm earns zero economic profit will increase. In an increasing-cost industry, long run supply is upward-sloping.

Suppose that the firms in the perfectly competitive oat industry currently are receiving a price of $2 per bushel for their product. The minimum possible average total cost of producing oats in the long run is $1 per bushel. It follows that:

new firms will enter the oat industry. Since price exceeds minimum long-run average total cost, firms will be making positive economic profits, and this will induce additional firms to enter the market.

a perfectly competitive firm can maximize its economic profit only by adjusting its

output

A firm will not increase its product price in a _______ competitive market.

perfectly

In a perfectly competitive market, the demand curve faced by an individual firm is:

perfectly elastic. In a perfectly competitive market, any one firm's output is so small relative to total market demand that a firm can sell whatever quantity it desires at the market price, making its demand curve horizontal.

A perfectly competitive firm in the long run earns:

positive normal profits but zero economic profits. Firm exit and entry in the long run guarantees zero economic profits, but entrepreneurs still earn a normal profit that reflects the opportunity cost of operating a firm.

To drive the market supply curve of a perfectly competitive market the quantities of all the firms are added up at each

price

a firm's revenue is calculated as _______ times quantity produced.

price

Barriers to entry:

restrict the number of firms in an industry. Since firms are not free to enter an industry with barriers, the number of firms is restricted. The level of output is not restricted.

a perfectly competitive firm may realize an economic profit or loss in the ____ run but will earn only a normal profit in the _____ run.

short, long

the _____ ______ is the point below where AVC = P where a firm is better off to temporarily shutdown instead of continuing to operate

shutdown, point

the market demand curve for a perfectly competitive industry

slopes downward

Spam (junk e-mail) is a major annoyance for many people who use the Internet. However, spammers sometimes have to send thousands of messages to get just one response that pays money. Given this information:

spamming can be profitable even with a very low number of buyers because the marginal cost of sending spam is virtually zero.

Firms within perfect competition are considered to be price

takers

The supply curve of a perfectly competitive firm is:

the marginal cost curve only if price exceeds average variable cost. The supply curve for a competitive firm is its marginal cost curve. If price does not exceed average variable cost, the firm will shut down immediately and quantity supplied will be zero.

on a graph with cost and revenue curves, which curve represents the perfectly competitive firm's short-run supply curve?

the marginal cost curve.

true or false: firms within perfect competition will produce identical products.

true

which of the following are conditions necessary to have perfect competition?

vary large numbers of firms and having products that are identical

which of the following best describes a firm continuing to operate even though it incurs an economic loss?

whenever the price exceeds AVC but is less than ATC, the firm covers its variable cost and is able to pay part of its fixed costs by producing.