Micro Ch. 12

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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. When maximizing​ profits, MR​ = MC is equivalent to P​ = MC because

the marginal revenue curve for a perfectly competitive firm is the same as its demand curve.

What is meant by productive​ efficiency? Productive efficiency is

when a good or service is produced at lowest possible cost.

Does the market system result in allocative​ efficiency? In the long​ run, perfect competition

results in allocative efficiency because firms produce where price equals marginal cost.

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.

When are firms likely to enter an​ industry? When are they likely to​ exit?

Economic profits attract firms to enter an​ industry, and economic losses cause firms to exit an industry.

Briefly discuss the difference between these two concepts.

Productive efficiency pertains to production within an industry while allocative efficiency pertains to production across all industries.

A startup firm in a perfectly competitive market finds that its average total cost is higher than the market price. Since the firm is incurring​ short-run losses, the management is debating whether to continue operations. Alex​ Ferguson, a senior​ manager, feels that this is a temporary phase and the firm should continue operations. Which of the​ following, if​ true, would support​ Alex's argument?

The current price of the product covers the variable cost of production.

What is a price​ taker? A price taker is

a firm that is unable to affect the market price.

What is the difference between a​ firm's shutdown point in the short run and its exit point in the long​ run? In the short​ run, a​ firm's shutdown point is the minimum point on the Why are firms willing to accept losses in the short run but not in the long​ run?

average variable cost​ curve, while in the long​ run, a​ firm's exit point is the minimum point on the average total cost curve. There are fixed costs in the short run but not in the long run.

Suppose Farmer Lane grows and sells cotton in a perfectly competitive industry. The market price of cotton is ​$1.58 per​ kilogram, and his marginal cost of production is ​$1.76 per​ kilogram, which increases with output. Assume Farmer Lane is currently earning a profit. Can Farmer Lane do anything to increase his profit in the short​ run? Farmer Lane

can increase his profit by producing lessless output.

What is meant by allocative​ efficiency? Allocative efficiency is when every good or service

is produced up to the point where price equals marginal cost.

When are firms likely to be price​ takers? A firm is likely to be a price taker when

it sells a product that is exactly the same as every other firm

What are the three conditions for a market to be perfectly​ competitive? For a market to be perfectly​ competitive, there must be

many buyers and​ sellers, with all firms selling identical​ products, and no barriers to new firms entering the market.

An increase in consumer income for a normal good will

shift demand outward.

*The graph at right represents the situation of Karl​ Kumquats, a kumquat grower. Karl is earning Karl's firm illustrates

zero economic​ profit, but could have a positive accouting profit. productive efficiency because price equals average total cost and allocative efficiency because marginal revenue equals marginal cost.


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