Econ 205 Chapter 14

Sunk Cost

A cost that has already been committed and cannot be recovered

Competitive Market

A market with many buyers and sellers trading identical products so that each buyer and seller is a price taker

In the long-run equilibrium of a competitive market with identical firms, what are the relationships among price P, marginal cost MC, and average total cost ATC?

P = MC and P = ATC

In the short-run equilibrium of a competitive market with identical firms, if new firms are getting ready to enter, what are the relationships among price P, marginal cost MC, and average total cost ATC?

P = MC and P > ATC

Marginal Revenue

The change in total revenue from an additional unit sold

Average Revenue

Total revenue divided by the quantity sold

If a profit-maximizing, competitive firm is producing a quantity at which marginal cost is between average variable cost and average total cost, it will

keep producing in the short run but exit the market in the long run.

A competitive firm maximizes profit by choosing the quantity at which

marginal cost equals the price.

A competitive firm's short-run supply curve is its ________ cost curve above its ________ cost curve.

marginal, average-variable-

Suppose pretzel stands in New York City are a perfectly competitive market in long-run equilibrium. One day, the city starts imposing a $100 per month tax on each stand. How does this policy affect the number of pretzels consumed in the short run and the long run?

no change in the short run, down in the long run

When a perfectly competitive firm increases the quantity it produces and sells by 10 percent, its marginal revenue ________ and its total revenue rises by ________.

stays the same, exactly 10 percent

A perfectly competitive firm

takes its price as given by market conditions.