Ch 12 Study Questions
Perfect competition exists in a market if
there are many firms producing an identical product
In the long-run equilibrium for a perfectly competitive market,
there is no incentive for entry or exit, average total costs of production are minimized, and the firms' economic profits are zero
If the market price of a perfectly competitive firm's product is below its average variable cost, then the firm's
total revenue if it stayed open wold be less than its total variable costs
Total economic profit is
total revenue minus total opportunity cost
A perfectly competitive firm initially is earning zero economic profit. Then, a decrease in demand for the firm's product occurs. In the long run, which of the following actions will this firm (most likely) take?
Exit the market
In the long-run equilibrium in a perfectly competitive market,
the firms' owners make a normal profit
In perfect competition
all firms in the market sell their product at the same price
In the long-run equilibrium, perfectly competitive firms produce where
average total cost is minimized
The owners will shut down a perfectly competitive firm if the price of its good falls below its minimum
average variable cost
Because each perfectly competitive firm sells a product identical to that of other firms,
each firm;s output is a perfect substitute for the output of any other firm
In perfect competition, the marginal revenue of an individual firm
equals the price of the product
In perfect competition, an individual firm
faces a perfectly elastic demand
If a perfectly competitive firm finds that it is producing an amount of output such that MR > MC and P > AVC, it will
increase its output
By producing less, a firm can reduce
its variable costs but not its fixed costs
In the long-run equilibrium in a perfectly competitive market, the firms produce at the lowest possible average total cost and the price equals the
lowest possible average total cost
Today, firms in a perfectly competitive market are making an economic profit. In the long run, firms will enter the market until all firms in the market are
making zero economic profit
In the long-run equilibrium, perfectly competitive firms produce the level of output such that
marginal cost equals the price, and average total cost is minimized
In the short run, a perfectly competitive firm's economic profits
might be positive, negative (economic loss), or zero (normal profit)
In the long run, perfectly competitive firms make zero economic profit. This result is due mainly to the point that a perfectly competitive market has
no barriers to entry and exit
Consumer surplus
plus producer surplus is maximized when resources are used efficiently
If the price of its product falls below the minimum point on the AVC curve, the best a perfectly competitive firm can do is to
shut down and incur an economic loss equal to its total fixed cost
