Chapter 12 economics
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.
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
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 selling an identical product, single firms have no effect on market price?
with many firms selling an identical product, single firms have no effect on market price
In perfect competition, long-run equilibrium occurs when the economic profit is
zero
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.
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.
"To maximize profit LOADING... , a firm should produce the quantity where the difference between marginal revenue LOADING... 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 this true or false
False. Profit is maximized at the output level where marginal revenue equals marginal cost.
for a market to be PERFECTLY COMPETITIVE, there must be...
MANY buyers and sellers, with all firms selling IDENTICAL products, and NO barrier to new firms entering the marker
"The economic model of perfectly competitive markets is fine in theory but not very realistic. It predicts that in the long run, a firm in a perfectly competitive market will earn no profits. No firm in the real world would stay in business if it earned zero profits." Is this remark correct or incorrect?
The remark is incorrect because the student has confused accounting profit and economic profit. Firms in a perfectly competitive market earn accounting profit, but no economic profit.
Why are firms willing to accept losses in the short run but not in the long run?
There are sunksunk costs in the short run but not in the long run.
Are perfectly competitive markets allocativelyallocatively efficient in the long run?
Yes, because firms produce where the marginal benefit to consumers equals the marginal cost of productionYes, because firms produce where the marginal benefit to consumers equals the marginal cost of production.
What is a price taker?
a firm that is unable to affect the market place
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?
by horizontally adding the individual firms' supply curves
Suppose Farmer Lane grows and sells cotton in a perfectly competitive industry. The market price of cotton is $1.681.68 per kilogram, and his marginal cost of production is $1.511.51 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?
can increase his profit by producing more output
In a perfectly competitive market, P = MR = AR because
firms can sell as much output as they want at the market price
Which of the following is not likely to happen in the pencil market?
firms will charge a price above marginal cost in the long run
"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
fixed cost since they do to vary with output
what condition make a market perfectly competitive?
it has MANY buyers and MANY sellers, all of whom are selling IDENTICAL products, with NO barriers to new firms entering the market
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." 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.
when are firms likely to be a price taker when
it sells a product that is EXACTLY THE SAME as ever other firm
What characterizes perfectly competitive markets?
many sellers
The increase in total revenue that results from selling one more unit of output is
marginal revenue
When the demand for cereals increased and the price went up to $10.5 per twenty-ounce pack, an industry analyst claimed that this would ensure a higher market share for each existing producer. This conclusion is flawed because:
new firms are likely to enter the market and compete away the profits.
What determines entry and exit of firms in a perfectly competitive industry in the long run?
new firms will enter if existing firms are making a profit and existing firms will exit if they are experiencing losses.
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
A buyer or seller that is unable to affect the market price is called
price taker
Perfectly competitive firms should produce the quantity where
the difference between TR and TC is as large as possible
how are pries determined in PERFECTLY COMPETITIVE MARKETS?
the interaction of market demand and supply because firms and consumers are price takers