Principles of Microeconomics Chapter 12: Perfect Competition

profit equation

(P-ATC)*Q

if P=ATC the firm is

breaking even- profits equal cost

sunk costs

costs that have already been paid and can't be recovered

if p> AVC the firm should

keep producing

P<ATC the firm is

making a loss

if P>ATC the firm is

making economic profits

what is the type of demand curve

perfectly elastic - can't do anything to price or sales changes infinitely

marginal revenue =

price in perfect competition

characteristics of perfect competition

- there are many buyers and sellers - all firms sell identical products - there are no barriers to new firms entering the market

What is productive efficiency? A) a situation in which resources are allocated such that goods can be produced at their lowest possible average cost B) a situation in which resources are allocated to their highest profit use C) a situation in which resources are allocated such the last unit of output produced provides a marginal benefit to consumers equal to the marginal cost of producing it D) a situation in which firms produce as much as possible

A) a situation in which resources are allocated such that goods can be produced at their lowest possible average cost

Figure 12-4 shows the cost and demand curves for a profit-maximizing firm in a perfectly competitive market. Refer to Figure 12-4. If the market price is $30 and the firm is producing output, what is the amount of the firm's profit or loss? A) loss of $1,080 B) loss of $2,520 C) profit of $1,300 D) profit of $1,440

A) loss of $1,080

A perfectly competitive firm's supply curve is its A) marginal cost curve above its minimum average variable cost. B) marginal cost curve above its minimum average total cost. C) marginal cost curve above its minimum average fixed cost. D) marginal cost curve.

A) marginal cost curve above its minimum average variable cost.

Quantity Total Cost (dollars) Variable Cost (dollars) 0 $1,000 $0 100 1,360 360 200 1,560 560 300 1,960 960 400 2,760 1,760 500 4,000 3,000 600 5,800 4,800 Table 12-1 shows the short-run cost data of a perfectly competitive firm that produces plastic camera cases. Assume that output can only be increased in batches of 100 units. Refer to Table 12-1. If the market price of each camera case is $8, what is the profit-maximizing quantity? A) 300 units B) 400 units C) 500 units D) 600 units

B) 400 units

A very large number of small sellers who sell identical products imply A) chaos in the market. B) the inability of one seller to influence price. C) a downward sloping demand for each seller's product. D) a multitude of vastly different selling prices.

B) the inability of one seller to influence price.

Figure 12-4 shows the cost and demand curves for a profit-maximizing firm in a perfectly competitive market. Refer to Figure 12-4. If the market price is $30, the firm's profit-maximizing output level is A) 0. B) 130. C) 180. D) 240.

C) 180.

The demand curve for an individual seller's product in perfect competition is A) the same as market demand. B) downward sloping. C) horizontal. D) vertical.

C) horizontal

If a typical firm in a perfectly competitive industry is earning profits, then A) all firms will continue to earn profits. B) new firms will enter in the long run causing market supply to decrease, market price to rise and profits to increase. C) new firms will enter in the long run causing market supply to increase, market price to fall and profits to decrease. D) the number of firms in the industry will remain constant in the long run.

C) new firms will enter in the long run causing market supply to increase, market price to fall and profits to decrease.

Quantity Total Cost (dollars) Variable Cost (dollars) 0 $1,000 $0 100 1,360 360 200 1,560 560 300 1,960 960 400 2,760 1,760 500 4,000 3,000 600 5,800 4,800 Table 12-1 shows the short-run cost data of a perfectly competitive firm that produces plastic camera cases. Assume that output can only be increased in batches of 100 units. Refer to Table 12-1. If the market price of each camera case is $8 and the firm maximizes profit, what is the amount of the firm's profit or loss? A) $0 (it breaks even) B) loss of $1,000 C) profit of $440 D) loss of $440

C) profit of $440

In long-run perfectly competitive equilibrium, which of the following is false? A) Economies of scale are exhausted. B) There is efficient, low-cost production at the minimum efficient scale. C) Economic surplus is maximized. D) Firms earn economic profit.

D) Firms earn economic profit.

profit maximizing where

MR=MC

TR=

P * Q

if P< AVC the firm should

stop producing

pricetakers

they can't do anything to the price that the market determines will be the price