ECON Ch09
What does the shaded area in the graph represent for a perfectly competitive firm that produces at output level Q?
Negative economic profit
What is a price taker? A price taker is
a firm that is unable to affect the market price.
Long-run equilibrium in perfect competition results in:
both productive and allocative efficiency
According to the graph, what is the value of total fixed cost for this perfectly competitive firm?
$2,400
At which price in this graph is the perfectly competitive firm earning negative economic profit?
$250
Why do single firms in perfectly competitive markets face horizontal demand curves?
With many firms selling an identical product, single firms have no effect on market price.
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.
A buyer or seller that is unable to affect the market price is called a __________.
price taker
What is the term given to a cost that has already been paid and cannot be recovered?
sunk costs
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.
According to the data in the table, what level of output maximizes profit?
8 units of output
If the average total cost curve is above the demand curve, then this firm is:
having economic losses
Suppose Farmer Lane grows and sells cotton in a perfectly competitive industry. The market price of cotton is $1.40 per kilogram, and his marginal cost of production is $1.72 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 less output.
A firm in perfect competition earns profit if:
price is greater than average total cost
The perfectly competitive firm represented in the graph on the right is experiencing a __________.
profit in the short run
In perfect competition, when a firm is making positive economic profit in the short run, then new firms enter the market causing the market supply curve to __________ and the market price to __________.
shift rightward, decrease
Which of the following is a characteristic of a perfectly competitive market?
there is a large number of buyers and sellers
According to the graph, which level of output maximizes profit?
8 shirts per minute
A firm producing good Y recently increased monthly production from 1,500 units to 2,000 units. This had no impact on the market price of good Y. At the new production level of 2,000 units, the firm's average cost is $3.5 while its marginal cost of production is $4. The marginal revenue however is fixed at $5 for all levels of output. Jake Williamson is the operations head of the firm. Jake feels that, since the firm has the capacity, it should have increased production further to 2,500 units which would have maximized profits. On the other hand, Mathew Hayden of the market research team anticipates an increase in price to $5.5 in the near future. He therefore claims that the firm may not be maximizing economic profit in the short run even at 2,500 units. Which of the following is most strongly implied by this information?
At the current level of production, the firm is making a profit of $3,000.
According to the graph, which demand curve is associated with the shutdown point for this perfectly competitive firm?
Demand Curve 2
A firm sells 10,000 units of X per month at the market price of $10. There are many other firms in this industry producing the same variety of X. With all firms producing an identical product, each firm is a price taker in this market. Farah Mahmood and her friend Daniela Rodriguez, both students of economics, are debating the impact of a recent increase in the demand for X. Farah feels that the demand faced by each firm will shift to the right. This in turn will increase the market price. Daniela meanwhile is not sure how much the price will rise because she thinks that the immediate response to the higher demand will be a rightward shift in each firm's supply curve. There were fifteen other firms producing 10,000 units of X per month at $10. When the demand increased, the equilibrium price went up to $11 and two new firms entered the market for X. In spite of this new entry, the supply of X by each firm increased to 10,500 units per month. Which of the following is most strongly supported by this information?
Each firm faces a perfectly elastic demand curve at $11.
According to the data in the table, when the price is $4, the firm would produce:
Four units of output, although it would suffer a loss from doing so
End of Chapter 1.6 [Related to Don't Let This Happen to You] Is the following statement correct or incorrect? "According to the model of perfectly competitive markets, the demand for wheat should be a horizontal line. But this can't be true: When the price of wheat rises, the quantity of wheat demanded falls, and when the price of wheat falls, the quantity of wheat demanded rises. Therefore, the demand for wheat is not a horizontal line."
Incorrect. The commentator is confusing the market demand for wheat with the demand line facing the representative firm.
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.
According to the graphs, which of the following is likely to happen in this market in the long run?
No other firms will enter this market
In the short run, the firm should:
Operate if price > average variable cost.
According to the graph the shut-down point corresponds to:
Point D
In this graph, the market is initially in long-run equilibrium at point A. If this is a constant-cost industry, after the decrease in demand, which point is likely to be a short-run equilibrium and which point is likely to be the next long-run equilibrium?
Point D is a short-run equilibrium and point C is the new long-run equilibrium.
In perfect competition, the marginal revenue is the same as:
Price
In reference to the graph, at what level of output does this perfectly competitive firm maximize profit?
Q3
According to the graph, if a perfectly competitive firm is producing at point A, which of the following is true?
The firm earns zero economic profit.
As the market demand shifts to the left, how will the firm's level of output change?
The firm will decrease its output and suffer losses.
Which graph best depicts an industry in which the firm's average costs decrease as the industry expands production?
The graph on the left
The late Nobel Prize-winning economist George Stigler once wrote, "the most common and most important criticism of perfect competition... [is] that it is unrealistic." Source: George Stigler, "Perfect Competition, Historically Contemplated," Journal of Political Economy, Vol. 55, No. 1, (February 1957), pp. 1-17. Despite the fact that few firms sell identical products in markets where there are no barriers to entry, economists believe that the model of perfect competition is important because
it is a benchmark long dash a market with the maximum possible competition long dash that economists use to evaluate actual markets that are not perfectly competitive.
A firm sells 10,000 units of X per month at the market price of $10. There are many other firms in this industry producing the same variety of X. With all firms producing an identical product, each firm is a price taker in this market. Farah Mahmood and her friend Daniela Rodriguez, both students of economics, are debating the impact of a recent increase in the demand for X. Farah feels that the demand faced by each firm will shift to the right. This in turn will increase the market price. Daniela meanwhile is not sure how much the price will rise because she thinks that the immediate response to the higher demand will be a rightward shift in each firm's supply curve. Farah's claim that each firm's demand curve will shift right is flawed because:
she is confusing the demand curve faced by the firm with the market demand curve.
