Econ 303 Chapter 8
shut down
a competitive firm should ___ ___ if its price is below AVC
zero economic profit
a firm is earning a normal return on its investment- it is doing as well as it could by investing its money elsewhere
positive economic profit
the horizontal demand curve lies above the minimum of the ATC curve
Price taker
Firm that has no influence over market price and thus takes the price as a given
Focused on revenue
Firms run by managers who answer to stock holders are
Profit equation
R-C=R-VC-FC
Producer surplus equation
R-VC
equal
along the demand curve, marginal revenue, average revenue and price are all
In a supply-and-demand graph, producer surplus can be pictured as the
area between the equilibrium price line and the supply curve to the left of equilibrium output.
average revenue (AR) curve and its Marginal Revenue (MR)
the demand curve, d, facing an individual firm in a competitive market is both its
short run
the firm may produce in the ___ ___ if the proce is greater than the AVC
If the market price for a competitive firm's output doubles then
the marginal revenue doubles
break even occurs when
the price (and the demand curve) are at the minimum of the ATC curve (since R=C--> pi=0)
If a competitive firm has a U-shaped marginal cost curve then
the profit maximizing output is found where MC = MR and MC is increasing.
When the TR and TC curves have the same slope,
they are furthest from each other
zero
to maximize the profit function, we take a derivative with respect to q and set it equal to
MR=MC
very important condition
economic loss
when the demand curve lies below the minimum of the ATC curve but above the minimum of the AVC the firm experiences an
break even
firms make zero economic profits or "normal" profits
Following Example 8.8 in the book, the long-run supply of rental housing in most U.S. communities is more inelastic than the long-run supply of owner-occupied housing. Why?
. A and C above are correct
Which of following is a key assumption of a perfectly competitive market?
. Each seller has a very small share of the market.
Suppose your firm has a U-shaped average variable cost curve and operates in a perfectly competitive market. If you produce where the product price (marginal revenue) equals average variable cost (on the upward sloping portion of the AVC curve), then your output will:
. exceed the profit-maximizing level of output.
The shutdown decision can be restated in terms of producer surplus by saying that a firm should produce in the short run as long as
. producer surplus is positive.
Refer to Figure 8.2. How much profit will the firm earn if price stays at $80?
80*64=1024
long run equilibrium occurs when 3 conditions hold:
All firms in the industry are maximizing profit, NO firm has an incentive to either exit or enter the industry because all the firms are earning zero economic profit and the price of the product is such that the quantity supplied by the industry is equal to the quantity demanded by consumers.
Free entry (or exit)
Condition under which there are no special cost that make it difficult for a firm to enter (or exit) an industry
What do cooperative firms do if they make a profit?
Cooperatives generally return the profits to their members as a dividend
I. In the long-run equilibrium of a perfectly competitive market, a firm's producer surplus equals the sum of the economic rents earned on its inputs to production. II. In the long-run equilibrium of a perfectly competitive market, the amount of economic profit earned can differ across firms, but not the amount of producer surplus.
I is true, and II is false.
If a competitive firm's marginal cost curve is U-shaped then
If a competitive firm's marginal cost curve is U-shaped then
producer surplus vs profit
PS is the sum of differences between the market price of a good and the marginal cost (MC) of production over all the units produces by a firm.
Price taking, Product homogeneity and Free entry and exit The model of perfect competition rest on three basic assumptions
The model of perfect competition rest on three basic assumptions
What happens in a perfectly competitive industry when economic profit is greater than zero?
There may be pressure on prices to fall. New firms may enter the industry. Firms may move along their LRAC curves to new outputs. Existing firms may get larger. ___________________________________________ All of the above may occur.
a horizontal line
because it is a price taker, the demand curve (d) facing an individual competitive firm is given by
these conditions hold a perfectly competitive market
consumers believe that all firms in the market sell homogenous or identical products, firms freely enter and exit the market, buyers and sellers know the prices charged by firms, and transaction cost are low
Suppose the state legislature in your state imposes a state licensing fee of $100 per year to be paid by all firms that file state tax revenue reports. This new business tax:
decreases marginal revenue. increases marginal cost. decreases marginal cost. increases marginal revenue. _______________________________ none of the above
Profit
difference between total revenue (R) and total cost (C)- both are functions of output, q. So profit (pi) which also depends on q,
With free entry and exit suppliers can
easily enter and exit a market
With free entry and exit buyers can?
easily switch from one supplier to another
perfectly elastic
horizontal line
Output decision
if the firm produces, what level of output level, q*, maximizes its profit or minimizes its loss
the firm is indifferent
if the price equals the minimum value of AVC curve, the firm will lose the same amount if it shuts down or if it operates
F=0--> PS=profit
in the short run
Shut down decision
it is more profitable to produce q* or to shut down and produce no output
Profit Function
pi(q)-R(q)-C(q)
If a competitive firm's marginal costs always increase with output, then at the profit maximizing output level, producer surplus is
positive because price exceeds average variable costs.
