AP Microeconomics Chapter 14

Firms that shut down in the short run are unable to avoid what costs?

fixed costs

A profit maximizing firm in a competitive market will always make marginal adjustments to production as long as what?

price is above or below marginal cost

When total revenue is less than total variable cost, a firm in a competitive market will what?

shut down

When price is below average variable cost, a firm in a competitive market will what?

shut down and incur fixed costs

When economists refer to a production cost that has already been committed and cannot be recovered, what term is used?

sunk cost

marginal revenue

the change in total revenue from an additional unit sold

Explain the difference between a firm's revenue and its profit. Which do firms maximize?

A firm's revenue is the price of the item times the number of items sold and its profit is the total revenue minus the total cost of producing the item, Firms maximize their profit because of the intersection on the graph.

Does a competitive firm's price equal the minimum of its average total cost in the short run, long run, or both? Explain.

In the long run because in the short run, the price may be greater than or less than but never equal.

Under what conditions will a firm shut down temporarily? Explain.

The firm shuts down if the revenue it gets from producing is less than the variable cost of production.

What are the main characteristics of a competitive market?

The main characteristics are there are many buyers and sellers, the goods offered by the sellers are relatively the same, and firms can freely enter or exit the market.

Does a competitive firm's price equal its marginal cost in the short run, in the long run, or both? Explain.

The price equals its marginal cost in both because the marginal revenue exceeds marginal cost in both and reduces output if it is less than marginal cost.

Under what conditions will a firm exit a market? Explain.

These conditions are considering the sunk costs and when average revenue is less than the cost of production.

Are market supply curves typically more elastic in the short run or in the long run? Explain.

They are more elastic in the long run because entry and exit in and out of the market occur until the price equals the ATC.

When a firm has little ability to influence market prices it is said to be in what kind of market?

a competitive market

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

The process of buying a good in one market at a low cost and selling the good in another market for a higher cost in order to profit from the price difference is known as what?

arbitrage

A firm in a competitive market produces and sells 500 door knobs at a price of $10 each. It then chooses to increase its output to 1,000 door knobs. After the increase in output, its average revenue will do what?

decrease

Which of the following statements best reflect a price-taking firm?

if the firm were to charge more than the going price, it would sell none of its goods

When you buy a product from a firm in a competitive market, the price you pay for the product is likely to be what?

less than the average revenue of the firm

What happens when marginal revenue equals marginal cost?

the profit maximizing firm should always increase its level of production

Because the goods offered for sale in a competitive market are largely the same, what will the sellers have?

the sellers will have little reason to charge less than the going market price

average revenue

total revenue divided by the quantity sold

When calculating marginal cost, what must the firm know?

variable cost

When can a firm not discriminate?

when it operates in a competitive market