Module 8

The firm's supply curve is the segment of the

MC curve above its intersection with the AVC curve.

A purely competitive seller is:

a "price taker."

Which of the following is characteristic of a purely competitive seller's demand curve?

Price and marginal revenue are equal at all levels of output.

Which of the following is not a valid generalization concerning the relationship between price and costs for a purely competitive seller in the short run?

Price must be at least equal to average total cost.

The rule is to produce at the level of output where marginal revenue equals (or is greater than) marginal cost as long as revenue is sufficient to cover variable cost (price is greater than average variable cost).

True

Suppose that at 500 units of output marginal revenue is equal to marginal cost. The firm is selling its output at $5 per unit and average total cost at 500 units of output is $6. On the basis of this information, we:

cannot determine whether the firm should produce or shut down in the short run.

Suppose you find that the price of your product is less than minimum AVC. You should:

close down because, by producing, your losses will exceed your total fixed costs.

In contrast to American firms, Japanese firms frequently make lifetime employment commitments to their workers and agree not to lay them off when product demand is weak. Other things being equal, we would expect Japanese firms to:

continue to produce in the short run at lower prices than would American firms.

If price exceeds average variable cost but is less than average total cost, a firm should

continue to produce the level of output at which marginal revenue equals marginal cost.

MR is constant and equal to P

demand curve is perfectly elastic

Price is constant to the individual firm selling in a purely competitive market because:

each seller supplies a negligible fraction of total supply.

If the price exceeds the average variable cost, by producing the level of output such that marginal revenue equals marginal cost, the firm ensures that it will

earn the largest profit possible.

If a purely competitive firm is maximizing economic profit:

it may or may not be maximizing per-unit profit.

The demand schedule or curve confronted by the individual, purely competitive firm is:

perfectly elasti

(Consider This) An unprofitable motel will stay open in the short run if:

price (average nightly room rate) exceeds average variable cost.

(Last Word) Oil wells and seasonal resorts will often shut down temporarily because:

prices for their output temporarily fall below their average variable costs of production.

The Ajax Manufacturing Company is selling in a purely competitive market. Its output is 100 units, which sell at $4 each. At this level of output total cost is $600, total fixed cost is $100, and marginal cost is $4. The firm should:

produce zero units of output

The fact that a purely competitive firm's total revenue curve is linear and upsloping to the right implies that:

product price is constant at all levels of output

(Last Word) Fixed costs for a firm are analogous to:

starting out in a hole that represents economic losses if the firm produces nothing.

Four Market Models

1. Pure Competition 2. Pure Monopoly 3. Monopolistic Competition 4. Oligopoly