Ch 12 Study Questions

Perfect competition exists in a market if

there are many firms producing an identical product

In the long-run equilibrium for a perfectly competitive market,

there is no incentive for entry or exit, average total costs of production are minimized, and the firms' economic profits are zero

If the market price of a perfectly competitive firm's product is below its average variable cost, then the firm's

total revenue if it stayed open wold be less than its total variable costs

Total economic profit is

total revenue minus total opportunity cost

A perfectly competitive firm initially is earning zero economic profit. Then, a decrease in demand for the firm's product occurs. In the long run, which of the following actions will this firm (most likely) take?

Exit the market

In the long-run equilibrium in a perfectly competitive market,

the firms' owners make a normal profit

In perfect competition

all firms in the market sell their product at the same price

In the long-run equilibrium, perfectly competitive firms produce where

average total cost is minimized

The owners will shut down a perfectly competitive firm if the price of its good falls below its minimum

average variable cost

Because each perfectly competitive firm sells a product identical to that of other firms,

each firm;s output is a perfect substitute for the output of any other firm

In perfect competition, the marginal revenue of an individual firm

equals the price of the product

In perfect competition, an individual firm

faces a perfectly elastic demand

If a perfectly competitive firm finds that it is producing an amount of output such that MR > MC and P > AVC, it will

increase its output

By producing less, a firm can reduce

its variable costs but not its fixed costs

In the long-run equilibrium in a perfectly competitive market, the firms produce at the lowest possible average total cost and the price equals the

lowest possible average total cost

Today, firms in a perfectly competitive market are making an economic profit. In the long run, firms will enter the market until all firms in the market are

making zero economic profit

In the long-run equilibrium, perfectly competitive firms produce the level of output such that

marginal cost equals the price, and average total cost is minimized

In the short run, a perfectly competitive firm's economic profits

might be positive, negative (economic loss), or zero (normal profit)

In the long run, perfectly competitive firms make zero economic profit. This result is due mainly to the point that a perfectly competitive market has

no barriers to entry and exit

Consumer surplus

plus producer surplus is maximized when resources are used efficiently

If the price of its product falls below the minimum point on the AVC curve, the best a perfectly competitive firm can do is to

shut down and incur an economic loss equal to its total fixed cost