Micro Ch. 12
Explain why it is true that for a firm in a perfectly competitive market, the profit-maximizing condition MR = MC is equivalent to the condition P = MC. When maximizing profits, MR = MC is equivalent to P = MC because
the marginal revenue curve for a perfectly competitive firm is the same as its demand curve.
What is meant by productive efficiency? Productive efficiency is
when a good or service is produced at lowest possible cost.
Does the market system result in allocative efficiency? In the long run, perfect competition
results in allocative efficiency because firms produce where price equals marginal cost.
What is the relationship between a perfectly competitive firm's marginal cost curve and its supply curve?
A firm's marginal cost curve is equal to its supply curve for prices above average variable cost.
When are firms likely to enter an industry? When are they likely to exit?
Economic profits attract firms to enter an industry, and economic losses cause firms to exit an industry.
Briefly discuss the difference between these two concepts.
Productive efficiency pertains to production within an industry while allocative efficiency pertains to production across all industries.
A startup firm in a perfectly competitive market finds that its average total cost is higher than the market price. Since the firm is incurring short-run losses, the management is debating whether to continue operations. Alex Ferguson, a senior manager, feels that this is a temporary phase and the firm should continue operations. Which of the following, if true, would support Alex's argument?
The current price of the product covers the variable cost of production.
What is a price taker? A price taker is
a firm that is unable to affect the market price.
What is the difference between a firm's shutdown point in the short run and its exit point in the long run? In the short run, a firm's shutdown point is the minimum point on the Why are firms willing to accept losses in the short run but not in the long run?
average variable cost curve, while in the long run, a firm's exit point is the minimum point on the average total cost curve. There are fixed costs in the short run but not in the long run.
Suppose Farmer Lane grows and sells cotton in a perfectly competitive industry. The market price of cotton is $1.58 per kilogram, and his marginal cost of production is $1.76 per kilogram, which increases with output. Assume Farmer Lane is currently earning a profit. Can Farmer Lane do anything to increase his profit in the short run? Farmer Lane
can increase his profit by producing lessless output.
What is meant by allocative efficiency? Allocative efficiency is when every good or service
is produced up to the point where price equals marginal cost.
When are firms likely to be price takers? A firm is likely to be a price taker when
it sells a product that is exactly the same as every other firm
What are the three conditions for a market to be perfectly competitive? For a market to be perfectly competitive, there must be
many buyers and sellers, with all firms selling identical products, and no barriers to new firms entering the market.
An increase in consumer income for a normal good will
shift demand outward.
*The graph at right represents the situation of Karl Kumquats, a kumquat grower. Karl is earning Karl's firm illustrates
zero economic profit, but could have a positive accouting profit. productive efficiency because price equals average total cost and allocative efficiency because marginal revenue equals marginal cost.