Microeconomics Chapter 12
What is the supply curve for a perfectly competitive firm in the short run? The supply curve for a firm in a perfectly competitive market in the short run is
that firm's marginal cost curve for prices at or above average variable cost.
If a firm decided to maximize revenue, would it be likely to produce a smaller or a larger quantity than if it were maximizing profit? The firm would produce a ______ quantity of output.
larger
What is the relationship between price, average revenue, and marginal revenue for a firm in a perfectly competitive market?
Price is equal to both average revenue and marginal revenue.
Which of the following is an expression of profit for a perfectly competitive firm? Profit for a perfectly competitive firm can be expressed as
Profit=(P×Q)−(ATC×Q), where P is price, Q is output, and ATC is average total cost.
Explain why it is true that for a firm in a perfectly competitive market that P = MR = AR. In a perfectly competitive market, P = MR = AR because
firms can sell as much output as they want at the market price.
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
Why would a firm produce in the short run while experiencing losses?
A firm would not shut down if by producing it would lose an amount less than its total fixed costs
Which of the following best explains why firms don't maximize revenue rather than profit?
At the point where revenue is maximized, the difference between total revenue and total cost may not be maximized.
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.
A student argues: "To maximize profit, a firm should produce the quantity where the difference between marginal revenue and marginal cost is the greatest. If a firm produces more than this quantity, then the profit made on each additional unit will be falling." Is the above statement true or false?
False. Profit is maximized at the output level where marginal revenue equals marginal cost.
Which of the following is a characteristic of perfectly competitive markets?
There will be no barriers to new firms entering the market.
Why do single firms in perfectly competitive markets face horizontal demand curves?
With many firms selling an identical product, single firms have no effect on market price.
What is a price taker? A price taker is
a firm that is unable to affect the market price.
A buyer or seller that is unable to affect the market price is called
a price taker.
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
average variable cost curve, while in the long run, a firm's exit point is the minimum point on the average total cost curve.
How is the market supply curve derived from the supply curves of individual firms? The market supply curve is derived
by horizontally adding the individual firms' supply curves.
According to an article in the New York Times, interest payments on bank loans make up more than half the costs of the typical solar panel manufacturer. The owner of a firm that imports solar panels made this observation about solar panel manufacturers: "So as long as companies can cover their variable costs and earn at least some revenue to put toward interest payments, they will continue to operate even at a loss." The interest payments these firms make are a The quote describes logical behavior of solar panel firms in the
fixed cost since they do not vary with output.; short run.
What characterizes perfectly competitive markets? Perfectly competitive markets have
identical products sold by all firms.
The late Nobel Prize-winning economist George Stigler once wrote, "the most common and most important criticism of perfect competition... [is] that it is unrealistic." Despite the fact that few firms sell identical products in markets where there are no barriers to entry, economists believe that the model of perfect competition is important because
it is a benchmark—a market with the maximum possible competition—that economists use to evaluate actual markets that are not perfectly competitive.
How are prices determined in perfectly competitive markets In perfectly competitive markets, prices are determined by
the interaction of market demand and supply because firms and consumers are price takers.
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.
Is the following statement correct or incorrect? "According to the model of perfectly competitive markets, the demand for wheat should be a horizontal line. But this can't be true: When the price of wheat rises, the quantity of wheat demanded falls, and when the price of wheat falls, the quantity of wheat demanded rises. Therefore, the demand for wheat is not a horizontal line."
Incorrect. The commentator is confusing the market demand for wheat with the demand line facing the representative firm.
How can BlackBerry best maximize its profit?
Increase revenues and cut costs.
Which of the following statements is true when the difference between TR and TC is at its maximum positive value?
MR = MC, Slope of TR = Slope of TC
What conditions make a market perfectly competitive? A market is perfectly competitive if
it has many buyers and many sellers, all of whom are selling identical products, with no barriers to new firms entering the market.
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.
The increase in total revenue that results from selling one more unit of output is
marginal revenue.
Refer to the graph to the right of the demand curve facing a firm in the perfectly competitive market for wheat. The fact that the demand curve is horizontal implies which of the following?
The firm can sell any amount of output as long as it accepts the market price of $7.00.
The financial writer Andrew Tobias has described an incident when he was a student at Harvard Business School: Each student in the class was given large amounts of information about a particular firm and asked to determine a pricing strategy for the firm. Most of the students spent hours preparing their answers and came to class carrying many sheets of paper with their calculations. When his professor called on him in class for an answer, Tobias stated, "The case said the XYZ Company was in a very competitive industry . . . and the case said that the company had all the business it could handle." Given this information, what price do you think Tobias argued the company should charge? (Tobias says the class greeted his answer with "thunderous applause.")
The market price.
Why are firms willing to accept losses in the short run but not in the long run?
There are fixed costs in the short run but not in the long run
Suppose you decide to open a copy store. You rent store space (signing a one-year lease), and you take out a loan at a local bank and use the money to purchase 10 copiers. Six months later, a large chain opens a copy store two blocks away from yours. As a result, the revenue you receive from your copy store, while sufficient to cover the wages of your employees and the costs of paper and utilities, doesn't cover all of your rent and the interest and repayment costs on the loan you took out to purchase the copiers. Should you continue operating your business?
Yes, because you are covering your variable costs.
Suppose Farmer Lane grows and sells cotton in a perfectly competitive industry. The market price of cotton is $1.56 per kilogram, and his marginal cost of production is $1.62 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 less output.
Suppose Farmer Lane grows and sells cotton in a perfectly competitive industry. The market price of cotton is $1.56 per kilogram, and his marginal cost of production is $1.43 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 more output.
A news story discussed the financial results for BlackBerry, the smartphone and software company: "Revenue tumbled 32% from a year earlier to $658 million in the quarter ended May 30 from $966 million a year earlier...BlackBerry posted profit of $68 million...up from $23 million a year earlier." It is possible for profits to increase even if revenue decreases if
costs decrease more than revenue decreases.
In 2015, some beer drinkers filed a lawsuit against Anheuser-Bucsh, the brewer of Beck's beer. The beer drinkers claimed that Beck's was marketed as an authentic German beer, but was actually brewed in St. Louis. Other breweries have established facilities in Canada so they can truthfully claim that their beers are "imported." If the market for beer were perfectly competitive, the location of breweries would
not matter to consumers since the product would be homogeneous.
How should firms in perfectly competitive markets decide how much to produce? Perfectly competitive firms should produce the quantity where
the difference between total revenue and total cost is as large as possible.
