Perfect Competition

Which of the following firms is the closest to being a perfectly competitive firm?

A hot dog vendor in New York

Label each of the following industries' level of competition based on your understanding of the characteristics of a perfectly competitive market

Household utility market=least competitive, Restaurants=somewhat competitive, Agricultural products=most competitive

Select all of the characteristics of a perfectly competitive market.

Identical or nearly identical products, free entry/exit, many firms

Given that a perfectly competitive firm's output is Q=10,000 units, what other pieces of information would you need to determine their profit?

Market price and total cost Market price, fixed costs, and the marginal cost for Q=10,000

Label each cost condition to a perfectly competitive firm's profit and output description

Price is above ATC=The firm is making a profit Price is above AVC, but below ATC=The firm will be losing money, but still operating in the short run Price is below AVC=The firm will shut down production

Raiman's Shoe Repair produces custom-made shoes. When Mr. Raiman produces 12 pairs per week, the marginal cost of the twelfth pair is $84, and the marginal revenue of the twelfth pair is $70. What would you advise Mr. Raiman do?

Produce fewer custom-made shoes.

Firms in a perfectly competitive corn industry earn $3.60 per bushel of corn, and their long run ATC is $4.50 per bushel. Which of the following is true?

These firms are earning a loss (negative profit). In the long run, existing firms will leave the industry.

A firm will continue to operate as long as price exceeds average variable cost.

True

Your local farmer has many competitors and exists in a market structure known as perfect competition. This means that price is determined outside of the individual farmers ability to change a price higher than the going market for a bushel of whet. Hence the farmer is ________.

a price taker and cannot affect the market price of wheat

Profit maximizing firms enter a perfectly competitive market when existing firms in that market have _________.

average costs less than market price

If a perfectly competitive firm finds that price is less than average variable cost it should _________.

cease operations

A perfectly competitive rice farmer currently faces a price of $2.75 per pound of rice, a marginal cost of $4.25 per additional pound of rice, and an average variable cost of $3.50 per pound of rice. The rice farmer would _______.

cease output of rice

A firm is producing 100 units with an average cost of $10 and a marginal cost of $7. If the firms is maximizing profit, then the firm's profit ______.

could be negative, positive or zero

If a perfectly competitive firm is currently producing a level of output at which marginal cost exceeds marginal revenue, then ________.

decreasing output would increase the firm's profit

Whenever a perfectly competitive firm chooses to change its level of output, its marginal revenue _______.

does not change

In the long-run the price for a perfectly competitive firm will ______.

equal the average cost where the average cost is at a minimum

A perfectly competitive firm's marginal revenue is

equal to the selling price

Suppose a profit-maximizing firm in a perfectly competitive market produces rubber bands. When the market price for rubber bands falls below the minimum of its average cost, but still lies above the minimum of aerage variable cost, in the short run the firm will ________.

experience a negative profit (loss) but will continue to produce rubber bands.

Tommy's Tires operates in a perfectly competitive market. If tires sell for $50 each and average total cost per tire is $40 at the profit-maximizing output level, then in the long run

more firms will enter the market

Suppose that the firms in the perfectly competitive oat industry are currently receiving a price of $2 per bushel for their product. The long-run average cost of producing oats is $1 per bushel. It follows that _________

new firms will enter the oat industry

In a perfectly competitive market, _________.

no one seller can influence the price of the product

Which of the answer choices best illustrates a perfectly competitive market structure?

peanuts

The profit-maximizing condition for a perfectly competitive firm is ______.

price equals marginal cost

In the short run, the perfectly competitive firm will always earn a positive profit when __________

price is greater than average cost

A key characteristic of a perfectly competitive market is that ________.

producers sell nearly identical products.

Each firm in a perfectly competitive market ________.

sets quantity based on market price

For a perfectly competitive firm, the profit-maximizing ouptut level occurs when marginal cost equals price.

true

In a perfectly competitive market, price is equal to marginal revenue.

true

In the short run, firms make production decisions based on marginal revenue and marginal cost rather than total profit

true

A perfectly competitive corn producer currently faces a price of $10 per bushel of corn and a marginal cost of $7 per additional bushel of corn. The corn producer would _______ output, which would _______ profit.

increase....increase

When marginal revenue is less than marginal cost, profit can be _______ by _______ output

increased.......decreasing

When marginal revenue is greater than marginal cost, profit can be ______ by _______ output.

increased.......increasing

Firms operating in perfectly competitive markets produce output levels where marginal revenue ________

is always equal to price

eBay.com is a vast auction site that has some similarities to a perfectly competitive market and some differences. Which of the answer choices describes how eBay is Similar to a perfectly competitive market?

it is easy to enter and exit eBay

A firm that shuts down temporarily has to pay

its fixed costs but not its variable costs

Christopher is a professional tennis player who gives tennis lessons. The industry is perfectly competitive. Christopher hires a business consultant to analyze his financial records. The consultant recommends that Christopher give fewer tennis lessons. The consultant must have concluded that Christopher's ___________.

marginal cost exceeds his marginal revenue

Charlene sells cotton candy. The cotton candy industry is competitive. Charlene hires a business consultant to analyze her company's financial records. The consultant recommends that Charlene increase her production. The consultant must have concluded that Charlene's

marginal revenue exceeds her marginal cost

Firms in a perfectly competitive corn industry earn $3.60 per bushel of corn, and their long run ATC is $4.50 per bushel. In the long run, the price per bushel of corn will be ____________ and economic profits will be __________.

$4.50; zero

A perfectly competitive market is one in which many firms produce many different varieties of the same products.

False

Which of the following characteristics describe a perfectly competitive firm that is maximizing profits

The amount of revenue of producing the next unit is equal to its cost, Adding additional output will lower profits, the amount of units sold is maximized

Which of the following statements about the perfect competitor is not correct

The products made by a perfectly competitive firm have no close substitues

When firms are said to be price takers, it implies that if a firm raises its price _____.

buyers will go elsewhere

Which of the following industries is most likely to exhibit the characteristic of free entry?

dairy farming

Suppose a firm's MR=$10 and MC=$11. The firm should

decrease output

The average cost of constructing homes is $50 per square foot. As a result of a sharp increase in the demand for home construction, the price of home construction increases to $75 per square foot. If the home construction industry is perfectly competitive, the firms will _______.

enter the industry and as a result the price will be below $75

As long as marginal cost is below marginal revenue, a perfectly competitive firm would _________.

increase production

If a firm finds that price is less than average variable cost (AVC) then it should

shut down

Perfectly competitive firms that earn a loss in the short run should _______.

shut down if price is less than average variable cost

Firms in a perfectly competitive industry are making losses. This is a ______.

signal to entrepreneurs that some of the firms in the industry should exit and the resources of these firms should move into production of other goods

A wheat farmer sells wheat to a gran broker in Des Moines, Iowa. Since the market for wheat is generally considered to be perfectly competitive, the wheat farmer maximizes profit by choosing _________.

the quantity at which market price is equal to the farm's marginal cost of production