Econ Chapter 10

Consider a profit-maximizing firm in a competitive industry. Under which of the following situations would the firm choose to produce where MR = MC?

-Minimum AVC < P < minimum ATC -P > minimum ATC

If it is possible for a perfectly competitive firm to do better financially by producing rather than shutting down, then it should produce the amount of output at which:

MR = MC.

Profit Maximizing Rule

MR=MC

In pure competition, economic profit is calculated as

Marginal revenue minus average total cost multiplied by quantity Price minus average total cost multiplied by quantity.

Consider a firm that has no fixed costs and that is currently losing money. Are there any situations in which it would want to stay open for business in the short run?

No, the firm will want to shut down

What is a price taker?

One of a large number of firms producing an identical product as every firm in its industry and only providing a fraction of total market supply.

A purely competitive firm whose goal is to maximize profit will choose to produce the amount of output at which:

TR exceeds TC by as much as possible.

The equality of marginal revenue and marginal cost is essential for profit maximization in all market structures because when this is true

the last unit produced adds more to revenue than to costs, and its production must necessarily increase profits or reduce losses.

in purely competitive markets, an individual firm does not exert control over_____

the total supply of the product, product price, and the firm's demand

True or False: "Marginal revenue is the change in total revenue associated with additional units of output."

true

Consider the statement: "Even if a firm is losing money, it may be better to stay in business in the short run." This statement is

true, if the loss is less than fixed costs.

A basic feature of the purely competitive market is the presence of _____.

a large number of sellers

when price is above ____ total cost, the firm incurs an economic profit

average

The firm should produce in the short run as long as price

exceeds the average variable cost.

Why do the demand and marginal-revenue curves have the same shape?

Demand is perfectly elastic; MR is constant and equal to P.

why does the price-marginal cost relationship improve as production increases?

At the very early stages of production, marginal product is low, making marginal cost unusually high

Why can a firm continue to operate even when it incurs an economic loss?

Whenever P exceeds AVC, but is less than ATC, the firm can pay part of its fixed costs by producing.

A firm with no fixed costs

is really in the long run.

If price is ______ than a firm's minimum average ____ cost, the firm will not operate

less; variable

A perfectly competitive firm that makes car batteries has a fixed cost of $10,000 per month. The market price at which it can sell its output is $100 per battery. The firm's minimum AVC is $105 per battery. The firm is currently producing 500 batteries a month (the output level at which MR = MC). This firm is making a _____________ and should _______________ production.

loss; shut down

in the short fun, a purely competitive firm will max profit by producing up to the point where marginal revenue is equal to marginal cost if

market price exceeds average variable cost

what improves as production increases?

price-marginal cost relationship

In pure competition, economic profit is calculated as product ______ or ______ (average) revenue minus average total cost multiplied by output.

price; marginal

what will alter costs and shirt the marginal cost or short-run supply curve to a new location?

prices of variable inputs, technology

Economic profit or loss is calculated as

profit/loss = (price or MR - ATC) x output

the portion of the firm's marginal-cost curve lying above its average-variable-cost curve is its

short-run supply curve.

Purely competitive firms produce ______ products

standardized

When an industry is purely competitive, price can be substituted for marginal revenue in the MR = MC rule because

the demand curve is perfectly elastic and the price is constant regardless of the quantity demanded, so MR is constant and equal to the price.