Perfect Competition Homework

accounting profit

A​ firm's revenues minus all its explicit costs

economic profit

A​ firm's revenues minus all its​ costs, implicit and explicit.

What determines entry and exit of firms in a perfectly competitive industry in the long​ run? In a perfectly competitive industry in the long​ run, A. new firms will enter if existing firms are making a profit and existing firms will exit if they are experiencing losses. B. new firms will enter if existing firms are making a profit and existing firms will exit if they are breaking even or experiencing losses. C. new firms will enter if price is above the shutdown point and existing firms will exit if price is below the shutdown point. D. new firms will enter if market demand exceeds market supply and existing firms will exit if market supply exceeds market demand. E. new firms cannot enter the market due to barriers but existing firms will exit if they are experiencing losses.

A. new firms will enter if existing firms are making a profit and existing firms will exit if they are experiencing losses. Entry and exit​ decisions: Profits and losses provide signals to firms that lead to entry and exit in the long run. For​ example, unless a firm can cover all its​ costs, it will shut down and exit the industry. More​ precisely, new firms will enter if existing firms are making a profit and existing firms will exit if they are experiencing losses. Next Question

The figure to the right represents the cost structure for a perfectly competitive wheat farmer with her average total cost​ (ATC) curve and marginal cost​ (MC) curve. At what market price will the wheat farmer break​ even? The wheat farmer will break even at a price of ​______ per bushel. ​(Enter your response as an​ integer.) If the market price for wheat were indeed ​$5 per​ bushel, should the wheat farmer exit the industry in the long​ run? In the long​ run, the wheat farmer A. should continue to produce wheat because breaking even is as high a return as she could earn elsewhere. B. should exit the industry because economic profit is negative when breaking even. C. should exit the industry because breaking even does not account for implicit opportunity costs. D. should continue to produce wheat because she will still have to pay her fixed costs of production even if she exits the industry. E. should exit the industry because accounting profit equals zero when breaking even.

5; A. should continue to produce wheat because breaking even is as high a return as she could earn elsewhere. Part 1: Break-even point: A firm is breaking even when its total cost equals its total revenue. Since perfectly competitive firms produce where price equals marginal​ cost, this occurs when price equals the lowest point on the average total cost curve​ (where the marginal cost curve intersects the average total cost​ curve). ​Therefore, a firm is breaking even when the market price is ​$5 per bushel of wheat. Part 2: Economic​ profit: A​ firm's revenues minus all its​ costs, implicit and explicit. Since accounting profit generally only includes explicit​ costs, breaking even corresponds to positive accounting profit. When breaking​ even, the wheat farmer should continue to produce in the long run because this is as high a return as she could earn elsewhere. Because economic profit takes into account all of the wheat​ farmer's costs, she should continue to produce because she can cover all her implicit opportunity costs.

price taker

A buyer or seller that is unable to affect the market price. Because farmer Smith is a price​ taker, he can sell as many baskets of apples as he chooses at the market price—but he​ can't sell any apples at all at a higher price.

break even point

Break-even point: A firm is breaking even when its total cost equals its total revenue.

Average revenue (AR)

Average revenue is total revenue divided by the quantity of the product​ sold: AR=TR/Q.

Which of the following is an expression of profit for a perfectly competitive​ firm? Profit for a perfectly competitive firm can be expressed as A. Profit=P−​MC, where P is price and MC is marginal cost. B. Profit=(P×Q)−(ATC×Q)​, where P is​ price, Q is​ output, and ATC is average total cost. C. Profit=(P−TC)×Q​, where P is​ price, Q is​ output, and TC is total cost. D. Profit=P×​Q, where P is price and Q is output. E. Profit=P−​ATC, where P is price and ATC is average total cost.

B. Profit=(P×Q)−(ATC×Q)​, where P is​ price, Q is​ output, and ATC is average total cost. Because Profit=TR−TC​, and TR is price​ (P) times quantity​ (Q), we can write the​ following: 1. Profit=TR−TC or 2. Profit=(P×Q)−TC. If we divide both sides of this equation by​ Q, we​ have: 3. Profit/Q=(P×Q)/Q−TC/Q​, or 4. Profit/Q=P−ATC​, where ATC is average total​ cost, because TC/Q equals ATC. This expression tells us that profit per unit​ (or average​ profit) equals price minus average total cost. We obtain an expression for the relationship between total profit and average total cost by multiplying by​ Q: Profit=(P−ATC)×Q.

What conditions make a market perfectly​ competitive? A market is perfectly competitive if A. it has many buyers and a few​ sellers, all of whom are selling differentiated ​products, with no barriers to new firms entering the market. B. it has many buyers and a few​ sellers, all of whom are selling identical ​products, with barriers to new firms entering the market. C. it has many buyers and many​ sellers, all of whom are selling identical​ products, with no barriers to new firms entering the market. D. it has many buyers and one​ firm, which produces a product with no close​ substitutes, with barriers to new firms entering the market. E. it has many buyers and many​ sellers, all of whom are selling differentiated​ products, with no barriers to new firms entering the market.

C. it has many buyers and many​ sellers, all of whom are selling identical​ products, with no barriers to new firms entering the market. Perfectly competitive markets A market that meets the following​ conditions: 1. Many buyers and sellers. Each individual buyer and seller is small relative to the entire​ market, and, as a​ result, cannot affect the market price. 2. All firms sell identical products. There can be no verifiable difference between the goods and services sold under perfect competition. 3. There are no barriers to entry into the market.

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 A. that​ firm's marginal revenue curve for prices at or above average fixed cost. B. that​ firm's marginal cost curve. C. that​ firm's marginal cost curve for prices at or above average total cost. D. a horizontal line equal to the market price. E. that​ firm's marginal cost curve for prices at or above average variable cost.

E. that​ firm's marginal cost curve for prices at or above average variable cost. The supply curve for a​ firm: Tells us how many units of a product the firm is willing to sell at any given price. The marginal cost curve for a firm in a perfectly competitive market tells us the same thing. The firm will produce at the level of output where price equals marginal cost. ​Therefore, a perfectly competitive​ firm's marginal cost curve is also its supply curve. ​However, if a firm is experiencing​ losses, it will shut down if its total revenue is less than its variable cost. That​ is, if price drops below average variable​ cost, the firm will have a smaller loss if it shuts down and produces no output. ​So, the​ firm's marginal cost curve is its supply curve only for prices at or above average variable cost.

How should firms in perfectly competitive markets decide how much to​ produce? Perfectly competitive firms should produce the quantity where A. the market price is as low as possible. B. their individual price is as high as possible. C. the difference between explicit costs and implicit costs is as large as possible. D. their individual price is equal to the market price. E. the difference between total revenue and total cost is as large as possible.

E. the difference between total revenue and total cost is as large as possible. Perfectly competitive firms cannot control price and are consequently price takers. Economists assume that the objective of such firms is to maximize profit​ (total revenue minus total​ cost). ​Therefore, to maximize​ profit, a firm should produce the quantity of output where the difference between total revenue and total cost is as large as possible.

economic profit

Economic​ profit: A​ firm's revenues minus all its​ costs, implicit and explicit. Since accounting profit generally only includes explicit​ costs, breaking even corresponds to positive accounting profit.

Suppose a farmer in Georgia begins to grow peaches. He uses​ $1,000,000 in savings to purchase​ land, he rents equipment for ​$80,000 a​ year, and he pays workers ​$140,000 in wages. In​ return, he produces 100,000 baskets of peaches per​ year, which sell for ​$3.00 each. Suppose the interest rate on savings is 1 percent and that the farmer could otherwise have earned ​$25,000 as a shoe salesman. What is the​ farmer's economic​ profit? What is the​ farmer's accounting​ profit?

Economic​ profit: A​ firm's revenues minus all its​ costs, implicit and explicit. Total revenue​ (TR): TR=P×Q. The​ farmer's total revenue is ​$300,000​: ​($3.00 per basket of peaches multiplied by 100,000 baskets of​ peaches). The​ farmer's explicit costs are ​$80,000 in rent and ​$140,000 in wages. The​ farmer's implicit costs are ​$25,000 in foregone salary and ​$10,000 in foregone interest​ (from $1,000,000 multiplied by the 1 percent interest​ rate). ​Therefore, total costs are ​$255,000​, and economic profit is ​$45,000 ​($300,000 in revenue minus ​$255,000 in​ costs). Accounting​ profit: A​ firm's revenues minus all its explicit costs. The​ farmer's total revenue is ​$300,000​: ​($3.00 per basket of peaches multiplied by 100,000 baskets of​ peaches). The​ farmer's explicit costs are ​$80,000 in rent and ​$140,000 in wages. ​Therefore, accounting profit is ​$80,000​, from ​$300,000 in revenue minus ​$220,000 in explicit costs.

perfect competition

In perfectly competitive​ markets, firms are price takers—they accept the market price as​ given, but not fixed. That​ is, events in the market​ (a change in demand or a change in​ supply) might change market​ price, but the individual buyer or seller is unable to affect the market price.

marginal revenue

Marginal revenue is the change in total revenue from selling one more unit of a product. More​ formally, it is the change in total revenue that results from a​ one-unit change in​ quantity, or: MR=ΔTR/ΔQ.

The figure to the right illustrates the average total cost​ (ATC) and marginal cost​ (MC) curves for an apple farmer. Assume the market for apples is perfectly competitive. If the market price for apples is ​$66.00 per​ crate, then what will be this apple​ farmer's profit? Use the rectangle drawing tool to shade in the apple​ farmer's profit. Label this shaded area​ 'Profit'. Carefully follow the instructions​ above, and only draw the required objects.

Profit maximization in a perfectly competitive​ market: A firm maximizes profit at the level of output at which marginal​ revenue, (MR), equals marginal​ cost, (MC). In perfectly competitive​ markets, marginal revenue equals the market​ price, (P). If the market price​ (P), of apples is ​$66.00 per​ crate, then the apple farmer will produce 7 hundred crates of​ apples, where​ (MR) =​ (MC) =​ (P). Profit per unit of​ output: P−ATC ​= profit per unit of output. Total​ profit: Total profit equals profit per unit multiplied by the number of units​ produced: (P−ATC)×Q. Total profit is represented by the area of a rectangle which has a height equal to ​(P−​ATC) and a width equal to​ Q, where this apple​ farmer's average total cost​ (of producing 7 hundred​ crates) is ​$30.00 per crate.

entry and exit decisions

Profits and losses provide signals to firms that lead to entry and exit in the long run.

total revenue

TR= P x Q

supply curve of a firm

Tells us how many units of a product the firm is willing to sell at any given price. The marginal cost curve for a firm in a perfectly competitive market tells us the same thing.

total revenue

Total revenue​ (TR): TR=P×Q.

The figure represents the cost structure for a perfectly competitive firm with its average total cost​ (ATC) curve, average variable​ (AVC) curve, and marginal cost​ (MC) curve. Suppose the market price is ​$10.00 per unit. Will firms enter or exit the industry in the long​ run? If market price is ​$10.00​, then firms will ______ the market in the long run. What effect will firms exiting have on the market​ price? When firms exit​, A. the average total cost of production will increase​, increasing price. B. market supply will increase​, increasing price. C. market supply will decrease​, increasing price. Your answer is correct. D. the marginal cost of production will increase​, increasing price. E. market demand will decrease​, increasing price.

exit; C. market supply will decrease​, increasing price. Your answer is correct. Entry and exit​ decisions: In the long​ run: If price is greater than average total cost​ (P>ATC), then new firms will enter the market. If price is less than average total cost​ (P<ATC), then existing firms will exit. The​ price, ​$10.00​, is less than average total​ cost, so firms will exit. part 2 Entry and exit​ decisions: In the long​ run: If P​ > ATC​, then new firms will enter the market. If new firms​ enter, then the market supply curve will shift to the right and decrease the market price. If P​ < ATC, then existing firms will exit. If existing firms​ exit, then the market supply curve will shift to the​ left, and increase the market price. Since firms are exiting the​ industry, market supply will decrease​, increasing the market price.

The figure to the right represents the cost structure for a perfectly competitive firm with its average total cost​ (ATC) curve, average variable​ (AVC) curve, and marginal cost​ (MC) curve. Fixed costs are​ $50.00. Suppose the market price is ​$23.00 per unit. Characterize the​ firm's profit. If the firm produces​ output, then it will ________ Should the firm instead shut down in the short​ run? In the short​ run, the firm should A. continue to produce because price is greater than average fixed cost. B. shut down because price is less than fixed costs. C. continue to produce because price is greater than average variable cost. D. shut down because price is greater than average variable cost. E. shut down because price is less than average total cost.

experience losses; C. continue to produce because price is greater than average variable cost. Part 1: Production decision in the short​ run: If the firm​ produces, then it will produce an output level where price equals marginal cost. If price is greater than average total​ cost, then the firm will make a profit. If price is equal to average total​ cost, then the firm will break even. If price is less than average total​ cost, then the firm will experience losses. The ​$23.00 price is less than the average total cost of​ production, so the firm will experience losses. part 2: ​Shut-down point in the short​ run: In the short​ run, if price is greater than average variable cost​, then the firm should continue to produce​ (because the firm would lose an amount less than fixed costs by shutting​ down). ​However, if price is less than average variable cost​, then the firm should stop production by shutting down. The ​$23.00 price is greater than average variable​ cost, so the firm should continue to produce.

The figure on the left represents the cost structure for a perfectly competitive wheat farmer with her average total cost​ (ATC) curve and marginal cost​ (MC) curve-this ​firm's cost curves are representative of most firms in the market. The figure on the right represents the market for wheat. part 1 Characterize profits for the firms in this industry. Firms in this market are currently; part 2 What will be the market price at the​ long-run competitive​ equilibrium? The​ long-run equilibrium price will be part 3 In​ long-run, firms will ________ the market until the marginal firm is earning ____________ .

making a profit; $4; enter, zero economic profit Part 1: Profits and​ losses: If P​ > ATC, then a firm will make a profit. If P​ = ATC, then a firm will break even. If P​ < ATC, then a firm will experience losses. The market price is initially ​$7.00​, where market supply equals market demand. When farmers produce the​ profit-maximizing quantity of​ wheat, price is greater than average total​ cost, so firms are making a profit. part 2: ​Long-run competitive​ equilibrium: The situation in which the entry and exit of firms has resulted in the typical firm breaking even. The​ long-run equilibrium market price is at a level equal to the minimum point on the typical​ firm's average total cost curve. ​Therefore, the​ long-run equilibrium price will be ​$4.00 per bushel of wheat.

Suppose Farmer Smith grows apples. The enitre market for apples is shown in the figure below. Assume the market for apples is perfectly competitive. Use the line drawing tool to draw the demand curve for farmer​ Smith's apples. Label this line​ 'Demand for Smith​ apples'.

​Therefore, the demand curve for his apples has an unusual​ shape: It is a horizontal line at the market price for​ apples, which is ​$10.00 per basket.