Chapter 14
Does a competitive firm's price equal the minimum of its average total cost in the short run, in the long run, or both? Explain.
A competitive firm's price equals the minimum of its average total cost in the long run. In the long run this economic profit lures other investors into the market and that leads to a rightward shift in the supply curve as the production increases for approximately similar demand. This phenomena occurs until the price equals the minimum of the average cost curve or there is no further incentive for more capital inflow
Under what conditions will a firm exit a market? Explain.
A firm will exit the market when the revenue it would receive is less than its total costs. This can eb simply expressed as when total revenue is less than total costs which in turn can the be simplified to when price is less than average total costs
Explain the difference between a firm's revenue and its profit. Which do firms maximize?
Firm's revenue is the product of the price(marginal cost in case of perfect competition) and output quantity while profit is average cost for that level of output quantity times output quantity subtracted from revenue.Firms maximize the profit.
Does a competitive firm's price equal its marginal cost in the short run, long run, or both?
In the short run price is equal to the marginal cost of production and the firms earn some economic profit. In the long run this economic profit lures other investors into the market and that leads to a rightward shift in the supply curve as the production increases for approximately similar demand. This phenomena occurs until the price equals the minimum of the average cost curve or there is no further incentive for more capital inflow.
If a profit-maximizing, competitive firm is producing a quantity at which marginal cost is between average variable cost and average total cost, it will
Keep producing in the short run but exit the market in the long run. A firm will remain open in the short term if the marginal cost exceeds average variable costs, however, a firm will exit the market if the marginal cost is less than average total costs. Therefore if the price is between these two curves the firm will stay open in the short term and exit in the longterm.
Are market supply curves typically more elastic in the short run or in the long run? Explain.
Market supply curves are typically more elastic in the long run than in the short run. Over a long period of time many changes are realized that could not be done in the short run. On the demand side it could be changes in the consumer preferences etc. On the supply side it could be more firms entering the market.
In the long-run equilibrium of a competitive market with identical firms, what are the relationships among price P, marginal cost MC, and average total cost ATC?
P = MC and P = ATC
Draw the cost curves for a typical firm. Explain how a competitive firm chooses the level of output that maximizes profit. At that level of output, show on your graph the firm's total revenue and total cost.
Profit is maximized when marginal revenue equals marginal cost.
What are the main characteristics of a competitive market?
The main characteristics of perfect competition are: a) Many small sellers b) Many small buyers c) There is no product differentiation. d) There is free entry and free exit. e) All buyers have the same amount of information.
Under what conditions will a firm shut down temporarily? Explain.
When the price falls below the average variable cost the firm exercises shut down. This happens when the marginal cost(equal to the price) is equal to the average variable cost. This point the minimum of average variable cost curve
A competitive firm maximizes profit by choosing the quantity at which
marginal cost equals the price
A competitive firm's short-run supply curve is its ______ cost curve above its _____ cost curve.
marginal, average variable
Pretzel stands in New York City are a perfectly competitive industry in long-run equilibrium. One day, the city starts imposing a $100 per month tax on each stand. How doss this policy affect the number of pretzels consumed in the short run and the long run?
no change in the short run, down in the long run
A perfectly competitive firm
takes its price as given by market conditions
