ECON Chapter 9 Study Guide
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.
"In a perfectly competitive market, in the long run consumers benefit from reductions in costs, but firms don't." Don't firms also benefit from cost reductions because they are able to earn greater profits?
No. Because short-run profits encourage entry, firms earn zero economic profit in the long run.
Which of the following are perfectly competitive markets? Manufacturing Computers
Perfectly Competitive: No Number of Firms: Few Type of Product: Differentiated Ease of Entry: Low
Now assume the top figure on the right shows the cost of production for a representative firm in the cocoa industry. The bottom figure shows the market for this industry.
Picture 17, 18, 19, 20, 21, and 22
Which of the following terms best describes the result of the forces of competition driving the market price to the minimum average cost of the typical firm?
Productive efficiency
Based on the numbers in the table below, how many bushels should this farmer produce in order to maximize profit?
Question 2a Question 2b
In perfect competition, long-run equilibrium occurs when the economic profit is
Zero
A student argues: "To maximize profit, a firm should produce the quantity where the difference between marginal revenue and marginal cost is the greatest. If a firm produces more than this quantity, then the profit made on each additional unit will be falling." Is the above statement true or false?
False. Profit is maximized at the output level where marginal revenue equals marginal cost.
Consider the graph below showing the market demand and supply for corn.Use the line drawing tool to graph the demand for the corn produced by one corn farmer. Properly label this line.
Picture 1
Why are consumers so powerful in a market system?
Because it is consumers' demand that influences the market price and dictates what producers will supply in the market.
In a perfectly competitive industry with increasing average costs, the long-run supply curve will be Which of the graphs above best depicts an industry in which the typical firm's average costs decrease as the industry expands production?
Upward sloping The graph on the left
Hedrick Smith was a foreign correspondent for the New York Times who lived in the Soviet Union in the 1970s, a period when the country had a planned economy rather than a market system. In a book he wrote about everyday life in the Soviet Union, Smith made the following observations about shopping in Moscow: At first it seemed...that the stores were pretty well stocked. Only as we began to shop in earnest...did the Russian consumer's predicament really come through to me. First, we needed textbooks for our children...and found that the sixth-grade textbooks had run out.... We tried to find ballet shoes for our 11-year-old daughter...only to discover that in this land of ballerinas, ballet shoes size 8 were unavailable in Moscow.... I tried to find shoes for myself. They were out of anything in my size but sandals or flimsy, lightweight shoes that the clerk, with one look at me, recommended against buying. "They won't last," he admitted. Judging by Smith's observations, did the Soviet Union achieve allocative efficiency in the production of sixth-grade textbooks, ballet shoes, and men's shoes? Briefly explain. Can we tell from these observations whether the Soviet Union achieved productive efficiency in the production of sixth-grade textbooks, ballet shoes, and men's shoes? Briefly explain.
No, it did not achieve allocative efficiency because the marginal benefit was greater than the marginal cost of production. The Soviet Union may or may not have achieved productive efficiency, depending on average costs.
By 2017, McDonald's had stopped selling Chicken McNuggets and other products made from chickens fed antibiotics. The change increased McDonald's costs, but an article in the Wall Street Journal noted that "...McDonald's ability to raise its prices is limited because of stiff competition." Does this "stiff competition" mean that the demand curve for McDonald's Chicken McNuggets is horizontal? Briefly explain.
No, the demand curve is not horizontal because Chicken McNuggets are not identical to other chicken products.
Suppose you decide to open a copy store. You rent store space (signing a one-year lease), and you take out a loan at a local bank and use the money to purchase 10 copiers. Six months later, a large chain opens a copy store two blocks away from yours. As a result, the revenue you receive from your copy store, while sufficient to cover the wages of your employees and the costs of paper and utilities, doesn't cover all of your rent and the interest and repayment costs on the loan you took out to purchase the copiers. Should you continue operating your business?
Yes, because you are covering your variable costs.
A buyer or seller that is unable to affect the market price is called
A price taker
Refer to the graph to the right of the demand curve facing a firm in the perfectly competitive market for wheat. The fact that the demand curve is horizontal implies which of the following?
The firm can sell any amount of output as long as it accepts the market price of $7.00
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.
The increase in total revenue that results from selling one more unit of output is What is the relationship between price, average revenue, and marginal revenue for a firm in a perfectly competitive market?
marginal revenue Price is equal to both average revenue and marginal revenue.
Would a firm earning zero economic profit continue to produce, even in the long run? In long-run competitive equilibrium, a firm earning zero economic profit
Will continue to produce because such profit corresponds with positive accounting profit.
The market for corn is perfectly competitive with 1,000 farmers. Suppose the farmers have identical short-run cost curves, which are illustrated in the figure below. Describe the market's supply curve.
Picture 11
The figure to the right represents the cost structure for a perfectly competitive firm with its average total cost (ATC) curve, average variable (AVC) curve, and marginal cost (MC) curve. Fixed costs are $50.00. Suppose the market price is $11.00 per unit. Characterize the firm's profit. If the firm produces output, then it will
Experience losses Shut down because price is less than average variable cost. OR continue to produce because price is greater than average variable cost.
Explain why it is true that for a firm in a perfectly competitive market that P = MR = AR. In a perfectly competitive market, P = MR = AR because
Firms can sell as much output as they want at the market price.
What determines entry and exit of firms in a perfectly competitive industry in the long run? In a perfectly competitive industry in the long run,
New firms will enter if existing firms are making a profit and existing firms will exit if they are experiencing losses.
Suppose that, at the beginning of the year, the price of corn is $3.80 per bushel and 14 billion bushels are harvested. There are approximately 400,000 corn farmers, so the average output per farmer is about 35,000 bushels. At the beginning of the year, the average corn farmer produced ______% of the total corn production. Initially, after the introduction of the new fertilizer, individual farmers selling corn are able to earn ______ profit. This will result in ______ the corn market, which will cause the ______ supply curve to shift to the ______ and will cause the market price to ________. At the new market price, corn farmers are earning _______ economic profit.
(35,000/14,000,000,000)×100 = 0.00025%. Picture 23 and 24 an economic; entry into; market; right; fall; zero
A columnist for the Wall Street Journal discussed how some firms were buying existing drilling operations in Canadian oil sands regions. These operations would not be profitable to build from scratch but were profitable to operate given that they were already built because, as the columnist said: "The key is the distinction between fixed and variable costs. While the fixed investment in new oil sands projects is prohibitive, variable costs can be in the low $20 range (say, $24) per barrel." The columnist estimated that the fixed cost of a new oil sands drilling operation could be $95 per barrel. At the time the column was written, the price of oil was about $50 per barrel. Assuming that the variable cost of an existing oil sands operation is $24 per barrel and the price of oil is $50 barrel, the companies selling their operations were losing $____ per barrel. At a price of $50 per barrel, were the companies buying the existing oil sands operations earning a profit of $26 per barrel? If not, explain what information we would need to calculate their profit.
-69 (50-24-95) We would need information on the cost of buying the existing operations to determine profits.
Suppose that Andy sells basketballs in the perfectly competitive basketball market. His output per day and his costs are as follows: Suppose the equilibrium price of basketballs is $2.50. In the short run, how many basketballs will Andy produce? _______
0 -10 (check TC top row)
At what market price will the wheat farmer break even? The wheat farmer will break even at a price of $_______ per bushel. If the market price for wheat were indeed $5 per bushel, should the wheat farmer exit the industry in the long run? In the long run, the wheat farmer
5 (find the middle point and then the dollar amount) Should continue to produce wheat because breaking even is as high a return as she could earn elsewhere.
Suppose the figure to the right illustrates the long-run average cost curve (AC) and the marginal cost curve (MC) for a representative firm in a perfectly competitive market. Assume all firms in the industry have the same cost structure. The other figure illustrates the market, with a market supply curve (S) and a market demand curve (D). How many firms are there initially? The industry has ________ firms. Will new firms enter or will existing firms exit in the long run? In the long run, firms will _______. How many firms will there be at the long-run equilibrium? In the long-run equilibrium, there will be _______ firms.
50 Enter 160
Which of the following are perfectly competitive markets? Manufacturing MP3 Players
Perfectly Competitive: No Number of Firms: Few Type of Product: Differentiated Ease of Entry: Low
Sony suffered losses selling televisions from 2004 to 2013, before finally earning a small profit on this business from 2014 to 2016. Given the strong consumer demand for plasma, LCD, and LED television sets, shouldn't Sony have been able to raise prices to earn a profit during that decade of losses? Illustrate on the graph to the right how an increase in demand could result in a lower market price.
Picture 26
The figure to the right illustrates the average total cost (ATC) and marginal cost (MC) curves for an apple farmer. Assume the market for apples is perfectly competitive. If the market price for apples is $42.00 per crate, then what will be this apple farmer's profit?
Picture 28
The graph to the right shows a firm in a perfectly competitive market making a profit. The graph includes the firm's marginal cost curve, average total cost curve, and average variable cost curve. Assume the market price is $28
Picture 3
Assume the market price is $24. The graph to the right shows a firm in a perfectly competitive market operating at a loss. The graph includes the firm's marginal cost curve, average total cost curve, and average variable cost curve.
Picture 4
Frances sells pencils in the perfectly competitive pencil market. Her output per day and costs are seen in the table to the right. a. If the current equilibrium price in the pencil market is $1.70, what price will Frances charge? b. Find the correct quantities for the missing values in the table, as represented by (i, ii, iii, and iv; enter all values as dollars and cents). (i) Marginal revenue is $_______. (ii) Total revenue is $_______. (iii) Marginal revenue is $_______. (iv) Total revenue is $_______. c. What quantity of pencils will maximize Frances' profit?_______ pencils.
Picture 5 a. $1.70 b(i). 1.70 (change on each thing for TR) b(ii). 6.80 (MR times the Output per day) b(iii). 1.70 (the MR row number) b(iv). 11.90 (MR times the Output per day) c. 6 (TR - TC and find the biggest difference)
The graph to the right represents the situation of Marguerite's Caps, a firm selling caps in the perfectly competitive cap industry. In order to maximize her profits, Marguerite should produce ______ caps. At the profit-maximizing level of output, she will earn a profit of $_______. Suppose Marguerite decides to shut down. Her loss would be $_______.
Picture 9 100 200 (Total profit is equal to price ($11) minus average total cost ($9) multiplied by the profit-maximizing quantity (100). Profit equals $200.) 300 (At an output level of 100, this is ($9−$6) × 100 = $300.)
If a perfectly competitive firm is producing at point A, in the graph to the right, which of the following is true? What does the shaded area in the second graph to the right represent for a perfectly competitive firm that produces at output level Q?
The firm earns zero economic profit. Negative economic profit
Refer to the graphs above. Suppose the graph on the left represents a typical firm's supply curve in a perfectly competitive industry, and there are 100 identical firms in the industry. What does the graph on the right represent?
The market supply curve
Assume the market for oranges is perfectly competitive. If the demand for oranges increases, will the market supply additional oranges? If the demand for oranges increases, then the market
Will supply additional oranges because producers seek the highest return on their investments.
Discuss the shape of the long-run supply curve in a perfectly competitive market. The long-run supply curve is Suppose that the perfectly competitive market illustrated in the graph to the right is initially in long-run equilibrium (at P1) and then there is a permanent increase in the demand for the product (D2). Show how the market adjusts in the long run.
A horizontal line equal to the minimum point on the typical firm's average total cost curve. Picture 12
Refer to the graphs above. What do you expect to happen in this market as it approaches long-run equilibrium? If the market demand curve shifts to the right, how will a competitive firm's level of output change? A perfectly competitive firm is losing money in the short run, and its price is less than its average variable cost. In order to minimize its losses in the short run, this firm should
A shift to the right of the market supply curve as new firms enter. The firm will increase its output, and its profits will increase. Shut down.
Matthew Rafferty produces hiking boots in the perfectly competitive hiking boot market. The table contains information on Rafferty's total costs. Fill in the missing values for AFC, AVC, ATC, and MC in the table. Suppose the equilibrium price in the hiking boot market is $120.00. In order to maximize profit, Rafferty should produce ________ boots, charge a price of $______, and earn the optimal profit of $________. Suppose the equilibrium price in the hiking boot falls to $85.00. In order to maximize profit, Rafferty should now produce _______ boots, charge a price of $______, and earn the optimal profit of $_______. Suppose the equilibrium price in the hiking boot falls to $50.00. In order to maximize profit, Rafferty should now produce _______ boots, charge a price of $_______, and earn the optimal profit of $_______.
AFC= Fixed Cost (number at top of YC column)/ Output AVC= Variable Cost/ Output ATC= Total costs/ output MC= change in total costs/ change in output
Which of the following terms best describes a state of the economy in which production reflects consumer preferences? Long-run equilibrium in perfect competition results in
Allocative efficiency Both A and B.
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 sunk costs in the short run but not in the long run.
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.
Which of the following statements is true when the difference between TR and TC is at its maximum positive value?
Both A and B are true.
How does perfect competition lead to allocative and productive efficiency? Perfect competition leads to allocative and productive efficiency
Both a and b.
How is the market supply curve derived from the supply curves of individual firms? The market supply curve is derived
By horizontally adding the individual firms' supply curves.
In 2017, Apple reported that since its iTunes App Store had opened in 2008, third-party app developers had earned more than $60 billion and currently employed 1.4 million people. Yet, as we've seen, because of intense competition, many game developers can only break even on the games they develop. If game companies can only break even on the mobile games they develop, in the long run, we would expect them to
Continue to develop mobile games because they can cover all costs of production if they break even.
An article in the Wall Street Journal discussing the financial results for General Electric Co. (GE) for the first quarter of 2017 reported that, compared with the same quarter in the previous year, the firm's revenue had fallen from $27.94 billion to $27.66 billion, while its profit had increased from $228 million to $653 million. It is possible for profits to increase even if revenue decreases if How can GE best maximize its profit?
Costs decrease more than revenue decreases. Increase revenues and cut costs.
Suppose an assistant professor of economics is earning a salary of $60,000 per year. One day she quits her job, sells $105,000 worth of bonds that had been earning 4 percent per year, and uses the funds to open a bookstore. At the end of the year, she shows an accounting profit of $85,000 on her income tax return. What is her economic profit? Her economic profit for the year is $________
Economic Profit= 85,000- (60,000+105,000 x (4/100))
The figure to the right represents the cost structure for a perfectly competitive firm with its average total cost (ATC) curve, average variable (AVC) curve, and marginal cost (MC) curve. Suppose the market price is $17.00 per unit. Will firms enter or exit the industry in the long run? If market price is $17.00, then firms will ______ the market in the long run. What effect will firms entering have on the market price? When firms enter,
Enter Market supply will increase, decreasing price OR exit Market supply will decrease, increasing price
The figure on the left represents the cost structure for a perfectly competitive wheat farmer with her average total cost (ATC) curve and marginal cost (MC) curve-this firm's cost curves are representative of most firms in the market. The figure on the right represents the market for wheat. Characterize profits for the firms in this industry. Firms in this market are currently The long-run equilibrium price will be $______. In long-run, firms will ______ the market until the marginal firm is earning ______.
Experiencing losses (look at both graphs, if right graph has a lower middle price its this answer) 5 (find center point of curved graph) Exit; zero economic profit
In a perfectly competitive industry with constant costs, the long-run supply curve will be
Horizontal
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.
What is meant by allocative efficiency? Allocative efficiency is when every good or service What is meant by productive efficiency? Productive efficiency is Briefly discuss the difference between these two concepts.
Is produced up to the point where the marginal benefit for consumers equals the marginal cost of producing it. When a good or service is produced at lowest possible cost. Productive efficiency pertains to production within an industry while allocative efficiency pertains to production across all industries.
In 2017, two beer drinkers in California filed a lawsuit against Kona Brewing Company, which sells Kona beer. The beer drinkers claimed that Kona was marketed as if it were brewed in Hawaii, but the beer is actually brewed in Oregon, Washington, Tennessee, and New Hampshire. If the market for beer were perfectly competitive, the location of breweries would
Not matter to consumers since the product would be homogeneous.
Which of the following are perfectly competitive markets? Bridge Building
Perfectly Competitive: No Number of Firms: Few Type of Product: Differentiated Ease of Entry: Low
Which of the following are perfectly competitive markets? Office Building Construction
Perfectly Competitive: No Number of Firms: Few Type of Product: Differentiated Ease of Entry: Low
Which of the following are perfectly competitive markets? Retail Bookselling
Perfectly Competitive: No Number of Firms: Many Type of Product: Differentiated Ease of Entry: High
Which of the following are perfectly competitive markets? Sub Sandwich Shops
Perfectly Competitive: No Number of Firms: Many Type of Product: Differentiated Ease of Entry: High
Consider a firm in each of the following three situations, and explain whether the firm will produce in the short run or shut down in the short run. In situation 1, the firm should In situation 2, the firm should In situation 3, the firm should
Produce 1,000 units of output and break even with a price of $10.00. Produce 1,000 units of output at a loss since the price is less than the average total cost. Shut down since the price is less than the average variable cost.
Which of the following is an expression of profit for a perfectly competitive firm? Profit for a perfectly competitive firm can be expressed as
Profit= (P−ATC)×Q, where P is price, Q is output, and ATC is average total cost. OR Profit= (P×Q)−(ATC×Q), where P is price, Q is output, and ATC is average total cost.
Suppose the price of wheat rises to $6.00 per bushel. Farmer Parker will maximize profits by producing nothing bushels of wheat (enter a whole number). He will make a profit of $_______
Question 1a Question 1b
Farmer Parker will maximize profits by producing ______ bushels of wheat (enter a whole number). Suppose that the marginal cost of wheat increases by $0.50 for every bushel of wheat produced. For example, the marginal cost of producing the eighth bushel of wheat is now $6.50. Will this increase in marginal cost change the profit-maximizing level of production for Farmer Parker? How much profit will Farmer Parker make now? $__________
Question 3a No Question 3b (Picture 2)
Farmer Parker's profit-maximizing level of production is 6 bushels of wheat. At this level of production he produces following the rule Marginal Revenue = Marginal Cost and earns the maximum possible profit of $8.00. Farmer Parker's fixed costs are $________ Suppose that fixed costs increase by $0.50. Farmer Parker's new profit-maximizing level of production after the increase in fixed costs is _______ bushels of wheat. The amount of profit that Farmer Parker will earn after the increase in fixed costs is $________. (Enter your response rounded to two decimal places.)
Question 4a Question 4b
Farmer Jones grows oranges in Florida. Suppose the market for oranges is perfectly competitive and that the market price for a crate of oranges is $19 per crate. Fill in total revenue, average revenue, and marginal revenue in the table below.
Question 5
What is the supply curve for a perfectly competitive firm in the short run? The supply curve for a firm in a perfectly competitive market in the short run is
That firm's marginal cost curve for prices at or above average variable cost.
How should firms in perfectly competitive market decide how much to produce? Perfectly competitive firms should produce the quantity where
The difference between total revenue and total cost is as large as possible.x
Refer to the graph to the right of the costs for a perfectly competitive firm. Which of the following best represents profit per unit of output? Which of the following best represents total profit?
The distance between points A and B The shaded rectangle
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.
In the figure to the right, Sacha Gillette reduces her output from 7000 to 5000 dozen eggs when the price falls to $2.20. At this price and this output level, she is operating at a loss. What option does Gillette have in this situation?
Try to cut her costs of production to decrease the loss in the short run.
According to an article in the Wall Street Journal, in 2007 the insurance company AXA Equitable signed a long-term lease on 2 million square feet of office space in a skyscraper on Sixth Avenue in Manhattan in New York City. In 2013, AXA decided that it only needed 1.7 million square feet of office space, so it subleased 300,000 square feet of space to several other firms. Although AXA is paying a rent of $88 per square foot on all 2 million square feet it is leasing, it is only receiving $40 per square foot from the firms subleasing the 300,000 square feet. AXA's actions might make economic sense in the short run if AXA's AXA's actions could make economic sense in the long run if AXA's
Variable cost per square foot was equal to or less than $40. Total cost per square foot is equal to $40 or less.
The chapter states, "Firms will supply all those goods that provide consumers with a marginal benefit at least as great as the marginal cost of producing them." A student objects to this statement by making the following argument: "I doubt that firms will really do this. After all, firms are in business to make a profit; they don't care about what is best for consumers." After reminding the class that we are assuming a competitive market, your professor would most likely give the following reply.
While it's true that firms don't care about consumer welfare, they do maximize profits by producing the efficient level of output.
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 accounting profit. Productive efficiency because price equals average total cost and allocative efficiency because marginal revenue equals marginal cost.
What is a price taker? A price taker is When are firms likely to be price takers? A firm is likely to be a price taker when
a firm that is unable to affect the market price it sells a product that is exactly the same as every other firm OR it represents a small fraction of the total market
The graph to the right represents the situation of a perfectly competitive firm. Determine the areas on the graph that represent the following: a. Total cost is represented by area ____ b. Total revenue is represented by area ___ c. Variable cost is represented by area ___ d. ___ is represented by area ___
a. A+B+C b. A+B c. A d. Loss;C
Suppose that the market for gluten-free spaghetti is in long-run equilibrium at a price of $3.50 per box and a quantity of 4 million boxes sold per year. Assume that the production of gluten-free spaghetti is a constant-cost industry. If the demand for gluten-free spaghetti increases permanently, which of the following combinations of equilibrium price and equilibrium quantity would you expect to see in the long run?
b. After demand increases, and supply increases, the quantity will be more than 4 million boxes, but the price will return to its initial level.
An article in the Wall Street Journal discusses the visual effects industry, which is made up of firms that provide visual effects for films and television programs. The article notes that: "Blockbusters... often have thousands of visual effects shots. Even dramas and comedies today can include hundreds of them." But the article notes that the firms producing the effects have not been very profitable. Some firms have declared bankruptcy, and the former general manager of one firm was quoted as saying: "A good year for us was a 5% return." What dynamics best describe the factors at play in this market? Market entry for visual effect companies is relatively
Easy, so firms can expect to earn zero economic profit in the long run.
Which of the following best explains why firms don't maximize revenue rather than profit? If a firm decided to maximize revenue, would it be likely to produce a smaller or a larger quantity than if it were maximizing profit? The firm would produce a _______ quantity of output.
At the point where revenue is maximized, the difference between total revenue and total cost may not be maximized. Larger
Which demand curve in the graph to the right is associated with the shutdown point for this perfectly competitive firm?
D2
Suppose you read the following item in a newspaper article, under the headline "Price Gouging Alleged in Pencil Market": Consumer advocacy groups charged at a press conference yesterday that there is widespread price gouging in the sale of pencils. They released a study showing that whereas the average retail price of pencils was $1.00, the average cost of producing pencils was only $0.50. "Pencils can be produced without complicated machinery or highly skilled workers, so there is no justification for companies charging a price that is twice what it costs them to produce the product. Pencils are too important in the life of every American for us to tolerate this sort of price gouging any longer," said George Grommet, chief spokesperson for the consumer groups. The consumer groups advocate passage of a law that would allow companies selling pencils to charge a price no more than 20 percent greater than their average cost of production. Which of the following is not likely to happen in the pencil market?
Firms will charge a price above marginal cost in the long run.
A student examines the graph to the right and argues, "I believe that a firm will want to produce at Q1, not Q2. At Q1, the distance between price and marginal cost is the greatest. Therefore, at Q1, the firm will be maximizing its profits." Is the student's argument correct or incorrect?
Incorrect. Profits are maximized at the quantity where marginal revenue equals marginal cost.
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." 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—a market with the maximum possible competition—that economists use to evaluate actual markets that are not perfectly competitive.
The following questions are about long-run equilibrium in the market for cage-free eggs. As described in the chapter opener, the market for cage-free eggs in 2015 was In the long run in the market for cage-free eggs, we would expect With the stricter guidelines, other things equal, the market price of cage-free eggs would _____ as the minimum long-run average cost _____. At the new market price, the long-run equilibrium quantity will be _____.
Not in equilibrium because farmers who were raising cage-free chickens were earning higher profits than farmers who raised chickens using more traditional methods. The equilibrium price to decrease and the equilibrium quantity to increase, as more firms enter. Increase; increases; smaller
Which of the following are perfectly competitive markets? Apple Growing
Perfectly Competitive: Yes Number of Firms: Many Type of Product: Identical Ease of Entry: High
Which of the following are perfectly competitive markets? Corn Farming
Perfectly Competitive: Yes Number of Firms: Many Type of Product: Identical Ease of Entry: High
Edward Scahill produces table lamps in the perfectly competitive desk lamp market. The equilibrium price of lamps is $60. a. Fill in the blanks in the table for total revenue and marginal revenue, as represented by (i and ii). (Enter your responses as integers.) (i)Total revenue is $_______. (ii) Marginal revenue is $______. b. How many table lamps will Edward produce to maximize profit? _____ lamps. c. If next week the equilibrium price of desk lamps drops to $30, should Edward shut down?
Picture 10 180 (TR blank space) 60 (MR column) 7 (TR - TC and find the highest one) No because price is greater than minimum AVC.
Assume the top figure on the right shows the cost of production for a representative farmer in the organic-farming industry. The bottom figure shows the market for this industry. In this example, farmers of organic corn have not experienced an increase in profits because the market price has _______
Picture 13, 14, 15, and 16 Not changed
The figure to the right represents the market for peaches. Assume the market for peaches is perfectly competitive and a constant-cost industry. Also assume the industry is initially in long-run equilibrium. Then, the demand for peaches increases, as shown, from D1 to D2.
Picture 25
Suppose Farmer Smith grows apples. The entire market for apples is shown in the figure below. Assume the market for apples is perfectly competitive.
Picture 27
Suppose that most wheat farms are suffering a loss. Now suppose that a new scientific study shows that eating four slices of whole wheat bread per day is an effective means of weight control, lowers blood pressure, and reduces the likelihood of heart disease. Assume that this study results in the typical wheat farm earning an economic profit. Use two graphs to illustrate the effect of the release of the study: one graph showing the effect on the market for wheat and another graph showing the effect on a representative wheat farm. Be sure your graph for the wheat market shows any shifts in the market demand and supply curve and any changes in the equilibrium market price. Be sure that your graph for the representative farm includes its marginal revenue curve, marginal cost curve, average total cost curve, any change in its demand curve, and the area showing its loss before the release of the study and its profit after the release. Assume the top figure on the right shows the cost of production for a representative farm in the wheat industry before the scientific study. The bottom figure shows the market for this industry before the study.
Pictures 6, 7, and 8
Suppose a farmer in Georgia begins to grow peaches. He uses $1,000,000 in savings to purchase land, he rents equipment for $60,000 a year, and he pays workers $140,000 in wages. In return, he produces 150,000 baskets of peaches per year, which sell for $3.00 each. Suppose the interest rate on savings is 11 percent and that the farmer could otherwise have earned $25,000 as a shoe salesman. What is the farmer's economic profit? The peach farmer earns economic profit of $_______. What is the farmer's accounting profit? The peach farmer earns accounting profit of $_______.
Question 6
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.
Does the market system result in productive efficiency? In the long run, perfect competition
Results in productive efficiency because firms enter and exit until they break even where price equals minimum average cost.
The financial writer Andrew Tobias has described an incident when he was a student at Harvard Business School: Each student in the class was given large amounts of information about a particular firm and asked to determine a pricing strategy for the firm. Most of the students spent hours preparing their answers and came to class carrying many sheets of paper with their calculations. When his professor called on him in class for an answer, Tobias stated, "The case said the XYZ Company was in a very competitive industry . . . and the case said that the company had all the business it could handle." Given this information, what price do you think Tobias argued the company should charge? (Tobias says the class greeted his answer with "thunderous applause.")
The market price
Suppose that the laptop computer industry is perfectly competitive and that the firms that assemble laptops do not also make the displays for them. Suppose that the laptop display industry is also perfectly competitive. Suppose that because the demand for laptop displays is currently relatively small, firms in the laptop display industry have not been able to take advantage of all the economies of scale in laptop display production. Use this information and the graphs below to answer the following questions. What happens to the price and profit of the individual laptop produced in the short run? As production of laptop displays increases, firms in the industry can now enjoy economies of scale. In the short run, makers of laptop displays will what? What will happen in the laptop market in the long run? Because the price of laptops falls in the long run as output increases, what is true about this industry?
They both rise. Be able to earn economic profit. Firms will enter the market. It is a decreasing-cost industry.
Suppose the market for cotton is perfectly competitive and that input prices increase as the industry expands. Characterize the industry's long-run supply curve. The cotton industry's long-run supply curve will be
Upward sloping because the long-run average cost of production will be increasing
