Chapter 10 - Exam 4

In a purely competitive industry, at a profit-maximization or loss-minimization, marginal ________ is equal to ___________.

-revenue; marginal cost -cost; price -revenue; price

Characteristics of a pure competition market

-very large numbers -standardized product -"price takers" -free entry and exit

four distinct market structures:

1) pure competition 2) pure monopoly 3) monopolistic competition 4) oligopoly

True or False: A pure monopoly involves a very large number of firms producing a single unique product.

False

Profit Equation

Profit = (P-A) x Q P = product price A = average total cost Q = output

Which of the following reasons could be given as an obstacle for a purely competitive firm in entering or exiting an industry?

There are no obstacles

very large numbers

a basic feature of a purely competitive market is the presence of a large number of independently acting sellers, often offering their products in large national or international markets. Examples: markets for farm commodities, the stock market, and the foreign exchange market

An oligopoly has _________ sellers and must consider the decisions of its rivals in determining its own _________ and output.

few; price

Product ______ distinguishes ___________ competition from all other market structures.

differentiation; monopolistic

Firms that operate in a purely competitive industry:

do not differentiate their products

In a perfectly competitive market, the demand curve for an individual firm is perfectly _________ at the market price.

elastic

_________ revenue is the additional revenue that an additional unit of ____________ would add to total revenue.

marginal; output

There are two ways to determine the level of output at which a firm will realize maximum economic ______________ or minimum economic ______________.

profit; loss

A firm will not increase its product price in a ___________ competitive market.

pure

__________ is relatively rare in the real world, although this market model is highly _______ to several industries.

pure competition; relevant

Purely competitive firms produce a(n) _________ product.

standardized

In a purely competitive industry, an increase in the price of product A supplied by one firm will cause consumers of product A to:

substitute other firms' products such as B, C, or D

A firm's price multiplied by the quantity of output or goods produced equals:

total revenue

average revenue

total revenue from the sale of a product divided by the quantity of the product sold (demanded); equal to the price at which the product is sold when all units of the product are sold at the same price.

To find economic profit it is ________ minus __________.

total revenue; total cost

Confronted with the market price of its product, the competitive producer will ask three questions:

(1) Should we produce this product? (2) If so, in what amount? (3) What economic profit (or loss) will we realize?

Marginal revenue is the ________ in total revenue that results from selling ________ (one word) more unit (extra unit) of output.

change; one

A purely competitive firm's marginal revenue curve will ________ the firm's demand curve.

coincide with

Since a purely competitive firm's average revenue curve equals price, it will also _______ the demand curve.

coincide with

In pure competition, marginal revenue and price are...

equal

In a perfectly competitive market, price is ___________ marginal revenue, therefore, price is ___________ marginal cost at the profit-maximizing output.

equal to; equal to;

A purely competitive firm's total revenue curve will

have a constant slope because each extra unit of sales increases total revenue by a constant amount

In regards to its slope, a purely competitive firm's demand curve is perfectly ____________.

horizontal (elastic)

A purely competitive firms' profit is _____________ when total revenue exceeds total cost by the maximum amount.

maximized

In pure competition, _______ equals marginal revenue because the price is constant.

price

In a pure competition, to calculate economic profit, we first calculate the difference between product __________ or __________ (average) revenue and average total cost and then multiply it by output.

price; marginal

In a purely competitive market, price per unit to the purchaser is synonymous with ________ per unit or ______ revenue to a seller.

revenue; average

The market demand curve for a purely competitive industry:

slopes downward

Match each market structure with the correct number of firms that dominate its industry.

very large number == pure competition relatively large number == monopolistic competition few == oligopoly one == monopoly

pure monopoly

A market structure in which one firm sells a unique product, into which entry is blocked, in which the single firm has considerable control over product price, and in which nonprice competition may or may not be found

Which of the following market structures produces only a standardized product?

A purely competitive market

price taker

A seller (or buyer) that is unable to affect the price at which a product or resource sells by changing the amount it sells (or buys).

Free entry and exit

New firms can freely enter and existing firms can freely leave purely competitive industries. No significant legal , technological, financial, or other obstacles prohibit new firms from selling their output in any competitive market.

Which of the following explains why a firm would not produce a unit of output where MC exceeds MR?

Producing it would add more to costs than to revenue, and profit would decline or loss would increase

Which of the following best describes the economic break-even point?

The point where total revenue covers all costs, including implicit and explicit costs

MR = MC rule

The principle that a firm will maximize its profit (or minimize its losses) by producing the output at which marginal revenue and marginal cost are equal, provided product price is equal to or greater than average variable cost.

When will a firm choose to produce?

When it can at least break even and generate a normal profit

At a profit-maximizing level of output of 25 units, a perfectly competitive firm's marginal revenue is $4, average variable cost is $0.30, average total cost is $1.22 and marginal cost is $3.75. This firm's economic profit equals:

$69.50

Which of the following are considered the four distinct market structures? -pure monopoly -communism -pure competition -oligopolistic competition -oligopoly -monopolistic competition -capitalisim

-pure monopoly -pure competition -oligopoly -monopolistic competition

Which of the following are conditions necessary to have pure competition? -standardized product -price searchers -barriers of entry -very large number of firms or sellers -free entry and exit

-standardized product -very large number of firms or sellers -free entry and exit

pure cometition

A market structure in which a very large number of firms sells a standardized product, into which entry is very easy, in which the individual seller has no control over the product price, and in which there is no nonprice competition; a market characterized by a very large number of buyers and sellers

oligopoly

A market structure in which few firms sell either a standardized or differentiated product, into which entry is difficult, in which the firm has limited control over product price because of mutual interdependence (except when there is collusion among firms), and in which there is typically nonprice competition

monopolistic competition

A market structure in which many firms sell a differentiated product, entry is relatively easy, each firm has some control over its product price, and there is considerable nonprice competition

imperfect competition

All market structures except pure competition; includes monopoly, monopolistic competition, and oligopoly

Which of the following best describes pure competition?

An industry involving a very large number of firms producing identical products and in which new firms can enter or exit the industry very easily.

break-even point

An output at which a firm makes a normal profit (total revenue = total cost) but not an economic profit.

Which of the following best explains why the firm should produce any unit of output whose marginal revenue exceeds its marginal cost?

Because the firm would gain more in revenue from selling that unit than it would add to its cost by producing it.

"Price takers"

In a purely competitive market, individual firms do not exert control over product price. Each firm produces such a small fraction of total output that increasing or decreasing its output will not perceptibly influence total supply or, therefore, product price. In short, the competitive firm is a price taker: It cannot change market price; it can only adjust to it. That means that the individual competitive producer is at the mercy of the market. Asking price higher than the market price would be futile. Consumers will not buy from firm A at $2.05 when its 9,999 competitors are selling an identical product, and therefore a perfect substitute, at $2 per unit. Conversely, because firm A can sell as much as it chooses at $2 per unit, it has no reason to charge a lower price, say, $1.95. Doing that would shrink its profit.

Two ways to determine the level of output at which competitive firm will realize maximum profit or minimum loss.

One method is to compare total revenue and total cost; the other is to compare marginal revenue and marginal cost.

Which of the following best describes the concept of a price taker?

One of a large number of firms producing an identical product as every firm in its industry and only providing a fraction of total market supply.

standardized product

Purely competitive firms produce a standardized (identical or homogeneous) product. As long as the price is the same, consumers will be indifferent about which seller to buy the product from. Buyers view the products of firms B, C, D, and E as perfect substitutes for the product of firm A. Because purely competitive firms sell standardized products, they make no attempt to differentiate their products and do not engage in other forms of nonprice competition.

market structure

The characteristics of an industry that define the likely behavior and performance of its firms. The primary characteristics are the number of firms in the industry, whether they are selling a differentiated product , the ease of entry, and how much control firms have over output prices. The most commonly discussed market structures are pure competition, monopolistic competition, oligopoly, pure monopoly, and monopsony

All of the following statements describe a purely competitive market, except:

a single seller selling only in national market.

short-run supply curve

a supply curve that shows the quantity of a product a firm in a purely competitive industry will offer to sell at various prices in the short run; the portion of the firm's short-run marginal cost curve that lies above its average-variable-cost curve

When price is _________ to a firm's lowest average ________ cost, the firm will be able to cover its _________ variable cost and its loss will equal its total __________ cost.

equal; variable; total; fixed

marginal revenue

the change in total revenue that results from the sale of 1 additional unit of a firm's product; equal to the change in total revenue divided by the change in the quantity of the product sold

If the market price is below the minimum wage average variable cost,....

the firm will minimize its losses by shutting down

total revenue

the total number of dollars received by a firm (or firms) from the sale of a product; equal to the total expenditures for the product produced by the firm (or firms); equal to the quantity sold (demanded) multiplied by the price at which it is sold.

A purely competitive firm will ask all of the following questions except:

will production result in normal profit?

A purely competitive firm's demand schedule equals its: -marginal-revenue schedule -revenue schedule -total-revenue schedule -average-revenue schedule

-marginal-revenue schedule -average-revenue schedule

Market models are distinguished based upon differences in: - the number of firms -non-price competition -conditions of entry -conditions of profits -type of product

- the number of firms -type of product -conditions of entry -non-price competition

In a purely competitive markets, an individual firm does not exert control over - product price - the firm's supply - the firm's profits - the firm's demand - the total supply of a product

-product price - the firm's demand - the total supply of a product