Econ 201 Homework: Ch. 8: Perfect Competition

Classify the statements based on whether each describes a perfectly (purely) competitive firm earning an economic profit, a firm at zero economic profits, or a firm operating at a loss. Economic Profit: Zero Economic Profit: Economic Loss: * P > ATC * new firms incentivized to enter market * P = ATC * at long-run equilibrium * P < ATC * firms incentivized to leave the market

Economic Profit: * P > ATC * new firms incentivized to enter market --- Zero Economic Profit: * P = ATC * at long-run equilibrium --- Economic Loss: * P < ATC * firms incentivized to leave the market

The accompanying graph illustrates a perfectly competitive firm's total revenue (TR) curve and total cost (TC) curve. The firm produces pumps, so assume it can only produce whole units of pumps (e.g., it can produce 5 or 6 pumps but not 5.5 pumps). Move the maximum profit line by adjusting its endpoints to represent the maximum profit the firm can possibly earn. a. When the firm is producing 4 pumps, profit is ____ when the firm is producing 9 pumps. b. When the firm is producing 2 pumps, profit is _____ when the firm is producing 8 pumps.

Max profit (7, 14) - (7,10) a. the same as b. less than

Consider the graph, which depicts a single competitive firm that wishes to maximize profits given its costs of production. a. What is the profit‑maximizing rule for this firm? A profit‐maximizing firm will: b. At which level of output will this firm maximize profits?

a. produce a level of output such that marginal revenue equals marginal cost. b. Output: 7 units

The table shows the cost and revenue information for a perfectly (or purely) competitive firm that produces external hard drives. Use whole numbers to answer the six questions. (refer to table in ch 8 notes) a. What is the marginal revenue received from the 11th unit? b. What is the marginal cost of producing the 11th unit? c. What price does this firm charge for each hard drive? d. How many units should this firm produce to maximize profits? e. When profit maximizing, what is this firm's profit?

a. $100 b. $38 c. $100 per unit d. 14 units e. $1000

Uncle Tyler's farm has costs and revenue as seen in the graph. What is Uncle Tyler's profit‑maximizing output? Refer to ch 8 notes a. profit‑maximizing output: b. What price will Uncle Tyler receive per unit at the profit‑maximizing level of output? c. Assuming that he maximizes his profit, how much profit will Uncle Tyler earn?

a. 7 b. $3 c. $14

The graph shows the cost curves of an individual firm in a perfectly (or purely) competitive industry. Use the points A, B, C, and D to trace out the firm's profit‑maximing output decisions, according to the instructions. Refer to q12 graph in ch8 notes Place point A at the shutdown decision point. Place point B at the point where the firm is making a loss but will continue to operate in the short run. Place point C at the break-even point. Place point D at the point where the firm is making an economic profit. --- Which point or points are included in the firm's supply curve in the short run?

A (12, 6) B (15, 7.5) C (18, 9) D (24, 12)

The graph contains the relevant cost curves for a perfectly (or purely) competitive firm. Move point A on the graph to the shutdown point. --- In order for the firm to earn positive economic profits the price of the good must be above what value? a. price of a good: b. What is the shutdown price for this firm? shutdown price:

A (400, 400) --- a. $600 b. $400

Which situation gives the best example of a price‑taker as it pertains to perfect competition? --- Clark grows corn and is a price‑taker. For each scenario, decide what Clark should do to his price. * Higher taxes, fuel prices, and wages are driving costs up for all corn farmers. * Clark's wife wants to buy a new house. She argues that raising the price of his corn by a few cents per bushel would pay for it in no time. * A bumper crop results in a much higher supply of corn this year.

Mary Beth grows cotton. She finds that she can always sell her entire crop at the market price. However, if she asks a price that is even slightly higher she cannot sell any of her cotton. --- * increase * not change * decrease

The graph presents the costs and revenue for a perfectly (purely) competitive firm, where the market price is equal to $600 per unit of output. This firm has a fixed cost equal to $3,600. Use this information to determine the optimal output and profit for this firm. What is the optimal output of this perfectly (purely) competitive firm? (Round your answer to the nearest whole number.) Refer to ch 8 notes a. optimal output= b. What is the maximum level of profits for this perfectly (purely) competitive firm? (Round your answer to the nearest positive or negative integer.)

a. 6 units of output b.

Suppose that the price of corn, a crop produced in a perfectly (or purely) competitive industry, increased 208% last year as demand for corn‑based ethanol fuel increased. a. What do you expect to happen in the long run for the corn industry given this recent success? --- Suppose the firms in the market for bacon, also a perfectly (or purely) competitive industry, experienced losses last quarter due to people becoming increasingly concerned about how high-fat diets negatively impact health. b. What do you expect to happen in the long run for the bacon industry?

a. Profits will be equal to zero. b. Profits will be equal to zero.

a. The long‑run industry supply curve in _____ is upward sloping. b. The long‑run industry supply curve in _____ is downward sloping.

a. an increasing‑cost industry b. a decreasing‑cost industry

Cathy is selling homemade earrings. She creates the earrings for a cost of $2 per pair and can sell them for $15 per pair. Assume she sells 20 pairs of earrings in one day. Given this information, select the term that corresponds to each of the given dollar amounts. a. $2×20=$40 is b. $15×20=$300 is c. $300−$40=$260 is

a. total cost b. total revenue c. profit

The statements refer to perfectly competitive markets in long‑run competitive equilibrium. Indicate whether each statement is true or false. a. In a long‑run competitive equilibrium, the typical firm will break even, earning zero economic profits. b. Suppose a perfectly competitive, constant‑cost industry is in a long‑run equilibrium. If there is an increase in market demand, firms will exit the industry. c. Suppose a perfectly competitive, constant‑cost industry is in a long‑run equilibrium. If there is a decrease in market demand that leads to an economic loss for the average firm, the market price will first decrease, and then increase. d. In a long‑run competitive equilibrium, the typical firm maximizes its profits by producing a level of output where the marginal revenue exceeds the marginal cost by the greatest amount possible. e. Productive efficiency occurs when a good or service is produced at the lowest possible cost. f. Allocative efficiency refers to the level of output where the marginal revenue is maximized.

a. true b. false c. true d. false e. true f. false

When is allocative efficiency met in a perfectly competitive market?

when price equals marginal cost

A perfectly competitive industry is characterized by

many firms with no control over the market price producing identical products.

The accompanying graph depicts the marginal cost (MC), average total cost (ATC), and marginal revenue (MR) curves for a perfectly (or purely) competitive firm. Move point A to identify the profit maximizing price and quantity for this firm. Refer to ch 8 notes

A (12, 12)

Salmon Incorporated (Inc.) sells salmon in a perfectly competitive market. Salmon Inc. is able to sell salmon for $600 per unit. In this market, there are 2000 firms competing with one another. Last year, Salmon Inc. was able to earn an economic profit of $1,000,000. The firm has purchased a permit to fish this season, insurance in case one of their workers gets hurt on the job, and a boat. Together, these items represent all of the firm's fixed costs and sum to $100,000. Last year, Salmon Inc.'s total revenue was $1,300,000. What is the marginal revenue per unit for this firm?

Marginal Revenue: $600 per unit

The table shows cost data of a purely competitive firm. Use this data to determine if each statement is true or false. Assume that any losses that the firm may earn are temporary. Output: 0, 100, 200, 300, 400, 500 Total Fixed Cost: $10,000, $10,000, $10,000, $10,000, $10,000, $10,000 Total Variable: $0, $18,000, $30,000, $46,000, $66,000, $92,000 a. If the market price is $200, then the breakeven point is at 200 units of output. b. If the market price is $160, then the firm will shut down. c. If the market price is $182, then the firm will produce and earn a negative economic profit. d. If the price is $200, then the firm will produce and earn a positive economic profit.

a. true b. false c. true d. true

Choose the answer that makes the statement correct: For firms in perfectly (purely) competitive markets, long‑run economic profits are _____ because firms will _____ this market if profits are less than that and _____ if profits are greater than that.

zero; exit; enter