Perfect Competition

In a perfectly competitive market, which of the following is correct?

The firm's demand curve is perfectly elastic.

According to the information in Table 7, if fixed costs double to $40, the firm should ________.

continue producing 5 units of output.

price taker:

firms in a perfectly competitive market; since no firm has any market power they must take the prevailing market price as given

productive efficiency:

given the available inputs and technology, it's impossible to produce more of one good without decreasing the quantity of another good that's produced

shutdown point:

level of output where the marginal cost curve intersects the average variable cost curve at the minimum point of AVC; if the price is below this point, the firm should shut down immediately

In Figure 1c above, the firm could return to profit if

it adopts better production technology to shift the average cost curve downwards.

If the raspberry farmer in Figure 1 decides not to produce at all but does not exit the market, costs will be ________.

roughly just under $100. This is a fixed cost that intersects the Total Cost / Total Revenue axis at an output level of zero.

market structure:

the conditions in an industry, such as number of sellers, how easy or difficult it is for a new firm to enter, and the type of products that are sold

In a market where positive economic profits are being made, entry will ________.

shift the marginal cost curve to the right.

According to the information in Table 7, if the price of output fell to $11.66, the firm should ________.

shutdown

break-even point:

the level of output where price just equals average total cost, so profit is zero

entry:

the long-run process of firms entering an industry in response to industry profits

exit:

the long-run process of firms reducing production and shutting down in response to industry losses

If a firm is earning positive economic profits from operations in a particular market, it follows that ________.

there is insufficient information provided to answer clearly. It is not stated whether profits are earned in the long run or the short run. If this is a long run outcome, the industry is likely non-competitive. If this is a short run outcome, it is possible for a firm to earn positive profits even if the natural structure of the industry is perfectly competitive. If these profits attract entry and are thus eroded over the long run, the industry can be characterized as perfectly competitive.

The switch between wheat and corn production implies that ________.

wheat producers must have observed above normal profits in corn production.

allocative efficiency:

when the mix of goods being produced represents the mix that society most desires

long-run equilibrium:

where all firms earn zero economic profits producing the output level where P = MR = MC and P = AC

profit margin:

at any given quantity of output, the difference between price and average total cost; also known as average profit

Profit maximization for the perfectly competitive firm means

the firm should produce where marginal costs = marginal revenue. Profit is maximized when the additional revenue earned from producing one more unit is equal to the additional cost of producing one more unit.

Recall that in perfect competition a firm's demand curve is a horizontal line drawn at the market price level and that P=MR. With this in mind, based on the figure below, total revenues are:

$220

Recall that in perfect competition a firm's demand curve is a horizontal line drawn at the market price level and that P=MR. With this in mind, based on the figure below, total variable costs are:

$432

Which of the following statements is correct?

If the individual raspberry producer's marginal cost is fixed such that for every level of output it remains constant, then the profit maximizing level of output is infinite. As long as constant marginal revenue is above marginal cost then the profit maximizing level of output is infinite.

All of the following are characteristics of Perfect Competition except:

Incomplete information about prices.

In perfectly competitive market, which of the following is correct?

The market demand curve is downward sloping and the firm's demand curve is flat.

Suppose the raspberry producer's "fixed" cost increases. What would the cost curve in Figure 1 look like now?

The total cost curve would maintain its curvature but would shift up by the amount of the fixed cost.

If a firm in perfect competition raises its price, profits will ________.

be driven down to below zero.

In the yoga center example above, if total revenue cannot be increased, the probability of shutdown will be reduced if ________.

it reduces its variable costs.

​The profit-maximizing choice for a perfectly competitive firm will occur where marginal revenue is equal to ________.

marginal cost

Refer to the graph below. Total profit is:

$144

Given the data provided in the table below, what will the fixed costs equal for production at quantity (Q) level 4?

$9.00

Which of the following statements is consistent with perfect competition?

A market offering identical goods where information is shared equally among consumers and firms.

Which of the following types of firms is likely to exist as a price taker?

A wheat farm. Wheat is known as a homogenous good and therefore cannot be easily differentiated. Moreover there are many wheat farms around the globe, none of which has any degree of market power.

In the corn example, suppose instead that the government announces the consumption of corn is unhealthy. Which of the following statements is most likely to be correct?

Corn producers will remain in the market as long as they can cover their variable costs but will exit once they are unable to cover their average cost. Exit will occur immediately if firms cannot cover variable costs. Exit will occur longer-term once total average costs are higher than corn prices.

Firms in a perfectly competitive market are said to be "price takers"—that is, once the market determines an equilibrium price for the product, firms must accept this price. If you sell a product in a perfectly competitive market, but you are not happy with its price, would you raise the price, even by a cent?

No, you would not raise the price.

How is the total revenue calculated in a perfectly competitive firm?

Quantity of goods sold times the market price.

zero economic profits:

a firm is covering all of its cost, including the opportunity costs of its capital; i.e. normal accounting profits

constant cost industry:

an industry whose technology is such that there is no advantage to size; a large firm faces the same average costs as a small firm does.

Using the information in Figure 1 and Table 2 above, at the market given price of $1.83 per pack of raspberries, the raspberry producer should ________.

continue to operate at an output level of 60 packs in order to minimize its losses. Minimum average variable cost is $1.72 at an output of 60 packs. Total cost at this level of output is $165. Losses would amount of $75 if the firm shutdown. But if the firm does not shut down, total costs remain $165 but revenues climb to $109.8. The loss is $55.20 < $75.

If the individual raspberry producers faces a horizontal demand curve then the market demand curve for raspberries must be ________.

downward sloping. The industry demand curve aggregates demand in all raspberry markets and is therefore downwards sloping indicating an elasticity of demand that is less than infinite. This is because other types of berries are imperfect substitutes for raspberries such that an increase in raspberry prices would divert some but not all consumers to other berries.

If the marginal benefits to society of the production of all goods are ________ the price of those same goods, the economy is said to be allocatively efficient.

equal to Allocative efficiency is achieved in a perfectly competitive when the marginal benefits of production are equal to the marginal cost of production. Since price = marginal cost in a perfectly competitive economy it follows that price = marginal benefits too.

Prices in an unregulated market economy that has achieved productive efficiency are likely to be ________.

equal to minimum average cost. In an unregulated market, productive efficiency can only be achieved in an economy that is perfectly competitive meaning prices are determined by minimum average cost.

perfect competition:

market structure where each firm faces many competitors that sell identical products so that no firm has any market power

profit-maximizing rule for a perfectly competitive firm:

produce the level of output where marginal revenue equals marginal cost

marginal revenue:

the additional revenue gained from selling one more unit of output

profit:

the difference between total revenues and total costs

In Figure 1a, the firm could increase its profits if

undertake efforts such as advertising to differentiate its raspberries from all other producers. The individual raspberry producer operating in a perfectly competitive industry cannot increase profits unless it can generate sufficient market power to enable it to increase its price above marginal cost.