Chapter 8

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A perfectly competitive firm is a price taker.

true

For the perfectly competitive firm, the demand curve and the marginal revenue curve are one and the same.

true

In a perfectly competitive market, firms face no barriers to entry or exit

true

In order for a firm to earn economic profits, price must exceed average total cost.

true

The demand curve faced by a perfectly competitive firm is horizontal at the price determined in the market.

true

When a firm produces the quantity of output where price equals marginal cost, it has achieved resource allocative efficiency.

true

Refer to Exhibit 22-8. What is the total cost of firm B at the profit-maximizing (or loss-minimizing) level of production? Hint: look at the ATC that is the total cost curve.

$400

Which of the following is not an assumption of the theory of perfect competition? There are many sellers and many buyers, none of which is large in relation to total sales or purchases. Each firm produces and sells a differentiated product. Buyers and sellers have all relevant information with respect to prices, product quality, and sources of supply. There is easy entry and exit.

Each firm produces and sells a differentiated product.

Refer to Exhibit 22-9. Suppose that the market starts out at long-run competitive equilibrium with price equal to P1 and producing Q1 output, and then demand increases from D1 to D2. As a consequence, the typical profit-maximizing firm will

decrease quantity produced by (q2 - q1).

For a price taker, market equilibrium price is $50. At 1,000 units, MR = MC, ATC = $45, and AVC = $30. This price taker will

earn $5,000 profits if it produces 1,000 units.

A perfectly competitive firm should shut down production in the short run if price is less than average fixed cost.

false

If the firm is producing a quantity of output for which MC > MR, then the firm should increase production to increase its profits.

false

In a perfectly competitive market, the market demand curve is perfectly elastic. Note that it asks about the market demand curve, not the demand curve facing a single firm.

false

One of the assumptions upon which the theory of perfect competition is built is that each firm produces and sells a heterogeneous product.

false

Refer to Exhibit 22-9. Following an increase in market demand from D1 to D2, the firm's profits in the short run will

increase by (P2 - P1) times q3.

Refer to Exhibit 22-9. Assume that demand increases from D1 to D2; in the new long run equilibrium, price settles at a level between P1 and P2 This means that the industry in question is a(n) __________-cost industry.

increasing

The demand curve facing a perfectly competitive firm is downward sloping. is upward sloping. is perfectly horizontal. is perfectly vertical. may be downward or upward sloping, depending upon the type of product offered for sale.

is perfectly horizontal.

The perfectly competitive firm will seek to produce the level of output for which average variable cost is at a minimum. average total cost is at a minimum. average fixed cost is at a minimum. marginal cost equals marginal revenue.

marginal cost equals marginal revenue.

Marginal revenue is total revenue divided by the quantity of output. total profit minus total costs. the change in total output brought about by using an additional unit of a variable input. the change in total revenue brought about by selling an additional unit of the good. the change in total revenue minus the change in total costs.

the change in total revenue brought about by selling an additional unit of the good.

In long-run equilibrium, the perfectly competitive firm earns __________ economic profits. positive zero negative any of the above

zero


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