Pure Competition

This graph shows a firm that:

is earning an economic profit

Productive efficiency refers to long-run market conditions where marginal cost is equal to marginal revenue.

False

Quantity supplied increases as price decreases and economic profit is usually higher at lower product prices and output.

False

The long-run supply curve for a competitive, decreasing-cost industry is upsloping.

False

True or false: A purely competitive firm in the short run will maximize profit by producing up to the point where marginal revenue is equal to marginal cost if the market price is less than minimum average variable cost.

False

This figure represents a constant-cost industry where the entry or exodus of firms does not affect resource prices, or therefore, unit costs. Therefore, a decrease in demand:

causes a contraction of output, but no change in price

Between P2 and P4, the firm will minimize its losses by producing and supplying the quantity at which:

MR=P=MC

In a purely competitive market, price per unit to a buyer equals:

average revenue to a seller

Productive efficiency refers to:

cost minimization, where P = minimum ATC.

All of the following describe purely competitive firms, except:

they engage in non-price competition

At the price of ______, output is ______ and the loss is ______ than the total ______ cost.

P3; Q3; less; fixed

This graph shows a firm that:

incurs a loss but continues to operate because price exceeds the lowest average variable cost

The purely competitive firm's supply curve:

is upward sloping when some inputs are fixed.

If price is than a firm's minimum average cost, the firm will not operate.

less; variable

In purely competitive markets, an individual firm does not exert control over ______.

the total supply of a product product price the firm's demand

A firm will break even where ______ will just cover ______ because the revenue per unit and the total cost per unit are equal.

total revenue; total cost

At which point will the firm be indifferent as to shutting down or continuing to produce?

Point b

Which market structure will lead to efficient uses of society's scarce resources?

Purely competitive market

In the short run, a purely competitive firm will maximize profit by producing up to the point where marginal revenue is equal to marginal cost if

market price exceeds average variable cost.

At price ______ the firm will realize an economic profit by producing and supplying ______ units of output. In fact, at any price above ______, the firm will obtain economic profit by producing to the point where MR=P=MC.

p5; q5; p4

There is no incentive for firms to enter or exit the industry in the long run when:

price equals minATC. MR = MC. firms earn a normal profit.

The portion of a firm's marginal cost curve that lies above its average variable cost is the firm's short-run curve.

supply

True or false: Higher resource prices create lower ATC and cause an upward shift of the long-run ATC curve.

False

Which would indicate that a firm is operating under conditions of pure competition and is being productively efficient?

It produces at the minimum average total cost.

In the long run, pure competition forces firms to produce at the minimum of average total cost and charge a price consistent with that cost.

True

Assuming a firm is producing at the profit maximizing level of output, if the price is greater than the average variable cost, but less than the average total cost, the firm's short run decision is to

continue to produce

If a firm is producing at their profit maximizing level of output and the firm earns a price of $15 per unit sold with average variable costs of $10 and average fixed costs of $7. What is the firm's economic profit or loss?

An economic loss of $7.

In maximizing profits at 9 units of output, the firm in this graph is adhering to which of the following decision rules?

Produce till the point where additional units of output add positively to total profit.

When will a firm earn an economic profit?

When price is greater than average total cost.

If existing firms are earning an economic loss, in the long run firms will the market.

exit

Pure competition produces a socially optimal allocation of resources in the long run because:

marginal cost equals price.

Allocative efficiency occurs when the:

marginal cost equals the marginal benefit to society.

For the firm, at a price of $131 and 7 units of output:

marginal revenue (MR) exceeds marginal cost (MC) and the firm should expand its output

At price ______ the firm will realize an economic profit by producing and supplying ______ units of output. In fact, at any price above ______, the firm will obtain economic profit by producing to the point where MR=P=MC.

p4; q4; p2

In pure competition, _____ equals marginal revenue because the price is constant.

price

In the short-run, a firm should produce if

price is equal to or greater than minimum average total cost, meaning that the firm is profitable or that revenues cover fixed costs. price is equal to or greater than minimum average variable cost, meaning that the firm is profitable or revenues cover fixed costs.

A firm will decide to shut down in the short run if:

price is less than average variable costs

According to the graph, the total revenue for an individual competitive firm at equilibrium is equal to

$11 111 x 8

Utilizing the following table, calculate the economic profit or loss from producing 7 units of output?

$276.99 (Price - Average Total Cost) x Total Output

In this table, at a price of $131, the profit-maximizing level of output is _____.

9 units of output

Given the following table, which of the following explains the firm's decision to shut down at a price of $71?

At every output level, AVC is greater than price. The smallest loss incurred by producing is greater than the fixed cost incurred by shutting down.

surplus is measured as the difference between the maximum willingness to pay and the actual price and surplus is measured as the difference between the minimum acceptable price and the actual price.

Consumer Producer

When a purely competitive firm is in long-run equilibrium and is allocatively efficient:

marginal cost equals marginal revenue.

Which of the following best explains why the firm should produce any unit of output whose marginal revenue exceeds its marginal cost?

The firm would gain more in revenue from selling that unit than it would add to its costs by producing it

Which of the following best describes why a firm continues to operate even though it incurs an economic loss?

Whenever price exceeds average variable costs but is less than average total costs, the firm can pay part, but not all, its fixed costs by producing.

Only firms that use the cost production methods will survive in a purely competitive industry.

lowest

A purely competitive firm finds that the market price for its product is $30.00. It has a fixed cost of $100.00 and a variable cost of $17.50 per unit for the first 50 units and then $37.50 per unit for all successive units.

a. Does price equal or exceed average variable cost for the first 50 units? Yes What is the average variable cost for the first 50 units? $ 17.50 b. Does price equal or exceed average variable cost for the first 100 units? Yes What is the average variable cost for the first 100 units? $ 27.5 c. What is the marginal cost per unit for the first 50 units? $ 17.50 per unit. What is the marginal cost for units 51 and higher? $ 37.50 per unit. d. For each of the first 50 units, does MR exceed MC? Yes What about for units 51 and higher? No e. What output level will yield the largest possible profit for this purely competitive firm? 50 units

A purely competitive industry is allocative efficient because at the market level marginal benefit equals

marginal benefit

A purely competitive wheat farmer can sell any wheat he grows for $30 per bushel. His five acres of land show diminishing returns because some are better suited for wheat production than others. The first acre can produce 1,000 bushels of wheat, the second acre 900, the third 800, and so on.

a. Fill in the table below to answer the following questions. How many bushels will each of the farmer's five acres produce? How much revenue will each acre generate? What are the TR and MR for each acre? (Top to bottom) Acre Yield: 1,000, 900, 800, 700, 600 Acre Revenue: 30,000, 27,000, 24,000, 21,000, 18,000 Total Revenue: 30,000, 57,000, 81,000, 102,000, 120,000 Marginal Revenue: 30,000, 27,000, 24,000, 21,000, 18,000 b. If the marginal cost of planting and harvesting an acre is $27,000 per acre for each of the five acres, how many acres should the farmer plant and harvest? 2 acres.

Karen runs a print shop that makes posters for large companies. It is a very competitive business. The market price is currently $1 per poster. She has fixed costs of $250. Her variable costs are $1,800 for the first thousand posters, $1,500 for the second thousand, and then $900 for each additional thousand posters.

a. To calculate average fixed cost (AFC) divide total fixed cost by the number of posters being produced (= total fixed cost/number of posters). Therefore, her AFC for 1,000 posters is $0.250 (= $250/1,000), for 2,000 posters $0.125 (= $250/2,000), and for 10,000 posters $0.025 (= $250/10,000). b. Before we calculate the average total cost (ATC) per poster, we need to find the average variable cost (AVC) per poster using the information above. The AVC is found by dividing the total variable cost by the number of posters produced. The AVC for 1,000 posters is $1.80. This is the total variable cost of $1,800 divided by the number of posters, 1,000. The AVC for 2,000 posters is $1.65. This is the total variable cost of $1,800 for the first 1,000 and $1,500 for the second 1,000 divided by the total number of posters, 2,000. The AVC for 10,000 posters is $1.05. This is the total variable cost of $1,800 for the first 1,000 and $1,500 for the second 1,000 and $900 per 1,000 (or 8 × $900) for the next 8,000 divided by 10,000 posters. Now we can find her ATC, which equals the sum of her average fixed cost and her average variable cost (= AFC + AVC). The ATC for 1,000 posters is $2.05 (= $0.250 + $1.80). The ATC for 2,000 posters is $1.775 (= $0.125 + $1.65). The ATC for 10,000 posters is $1.075 (= $0.025 + $1.05). c. No. Since the price is 85 cents per poster, Karen will shut down because average variable cost never falls below, or is equal to, 85 cents per poster.

Whenever price is ______ than average variable costs but is ______ than average total costs, the firm can pay part, but not all its ______ costs by producing.

greater; less; fixed

The entry of new firms to an increasing-cost industry will resource prices.

increase

Firms within pure competition are:

likely to earn zero economic profit in the long run