Chapter 12 Review Questions

Why are firms willing to accept losses in the short run but not in the long run?

Because of the fact that there are fixed costs in the short run but not in the long run.

How is the market supply curve derived from the supply curves of individual firms?

Through adding up quantities demanded by all individual consumers for each price.

What is a price taker?

A buyer or seller that is unable to affect the market price: If a perfectly competitive firm tries to raise its price, it won't sell anything at all because consumers will switch to buying the product from the firm's competitors.

What are the three conditions for a market to be perfectly competitive?

1. There must be many buyers and many firms, all of which are small relative to the market. 2. The products sold by all firms in the market must be identical. 3. There must be no barriers to new firms entering the market.

Explain why it is true that for a firm in a perfectly competitive market, P = MR = AR.

A firm in a perfectly competitive market is a price taker and can sell as many units as it wishes at the market price P. By selling an additional unit, the firm receives additional (or marginal) revenue of P. Because each unit is sold at P, the average revenue will also equal P, and we get the result P [price] = MR [marginal revenue] = AR [average revenue]: Simply put, the marginal revenue curve for a perfectly competitive firm is the same as its demand curve.

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.

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.

In a perfectly competitive market, MR [marginal revenue] = P [price], because firms are price takers, thus making these two conditions equivalent.

What is the difference between a firm's shutdown point in the short run and in the long run?

Shutdown point is defined as the minimum point on a firm's average variable cost curve; if the price falls below this point, the firm shuts down production in the short run. In the short run: firm's shut down point is the minimum point on the average variable cost curve In the long run: firm's shut down point is the minimum point on the average total cost curve

Explain why at the level of output where the difference between TR and TC is at its maximum positive value, MR must equal MC.

The Slope of TR [total revenue]​ = Slope of TCMR​ = MC

P = ATCP = ATC means that ___.

The firm breaks even (its total cost equals its total revenue)

P <ATCP < ATC means that ____.

The firm experiences a loss

P > ATCP > ATC means that ___.

The firm makes a profit

Whether or not a firm produces output depends on _________.

The relationship of price to average total cost.

When are firms likely to be price takers?

When it is in a perfectly competitive market, representing a small fraction of the total market, and is therefore selling exactly the same product as every other firm, firms can sell as much as they wants without having to lower their prices, however if they try to raise their prices, they won't sell anything at all because consumers will switch to buying the product from the firm's competitors, thus forcing them to be price takers, rather than fail.