Econ 1 Module 24, 25, 26: Perfect Competition

Module 26: In perfect competition, the profit-maximizing level of output occurs where the:

MR = MC above minimum AVC.

Module 25: A perfectly competitive firm maximizes profit by producing the quantity at which:

MR = MC.

Module 25: In the short run, a perfectly competitive firm produces output and breaks even if the firm produces the quantity at which:

P = ATC.

Module 26: Which is the formula for a firm's profit?

Profit = (Price − ATC) × Quantity

Module 25: If a firm has a total cost of $500 at a quantity of 50 units, and it is at that quantity that average total cost is minimized for the firm, what is the lowest price that would allow the firm to break even? Explain.

The lowest price that would allow the firm to break even is $10, because the minimum average total cost is $500/50 = $10, and price must at least equal minimum average total cost for the firm to break even.

Module 24: Suppose that Madelyne builds a new jumbo jet that can carry five times more passengers than any other competitor. She has high fixed costs due to the quantity of capital used to build the jets, and average cost is decreasing for all levels of demand. In this case, Madelyne's monopoly would result from:

economies of scale.

Module 24: For a firm, being a price taker means that the demand curve is a straight _____ line at the market price.

horizontal → The demand curve shows that the perfectly competitive firm can sell as much as it wants at the market price.

Module 24: In a perfectly competitive industry, the firm's demand curve is

horizontal. → The firm's demand curve is perfectly elastic because each firm sells at the price determined in the market.

Module 25: Marginal revenue is a firm's:

increase in total revenue when it sells an additional unit of output.

Module 26: The short-run supply curve for a perfectly competitive firm is its:

marginal cost curve above its average variable cost curve.

Module 25: A perfectly competitive firm will maximize profit at the quantity at which the firm's marginal revenue equals

marginal cost.

Module 26: A firm should continue to produce in the short run as long as price is at least equal to

minimum AVC.

Module 26: The shut-down point in the short run is the:

minimum point of AVC.

Module 24: In the fast food industry, there are many firms producing a differentiated product. This is an example of which market structure?

monopolistic competition

Module 24: Because of the existence of a large number of similar but not identical substitutes in most communities, the market for chiropractors is best considered to be:

monopolistically competitive.

Module 24: An insurance company that is the only company selling mandatory health insurance in a state is an example of which market structure?

monopoly → An insurance company that is the only company that sells health insurance in a state is an example of a monopoly because it is the only seller of a product with no close substitutes.

Module 25: For a firm producing at any level of output lower than the most profitable one, an increase in output adds:

more to total revenue than to total cost.

Module 24: In the market for soft drinks, there are a small number of firms selling differentiated products. This is an example of:

oligopoly

Module 24: An industry characterized by a few interdependent firms and barriers to entry is called:

oligopoly.

Module 24: In the market for wheat, there are many farmers selling exactly the same type of wheat. This is an example of:

perfect competition

Module 24: An industry with a large number of small firms producing a standardized product in a market with easy entry and exit of firms is:

perfectly competitive.

Module 26: A perfectly competitive firm will shut down when:

price < average variable cost. → The shut-down point occurs at that output where the firm cannot cover its variable costs. This is the level of output equal to the point where price falls below average variable costs at the optimal output level.

Module 24: Cotton farmers in Texas cannot influence the price of cotton so they are

price-takers. → Producers who cannot influence the product price are price takers.

Module 25: Marginal revenue is a firm's:

ratio of the change in total revenue to the change in output.

Module 24: If a firm is a price-taker, it can

sell as much as would like at the going market price.

Module 24: Oligopoly is a market structure that is characterized by a:

small number of interdependent firms producing identical or differentiated products.

Module 24: In order for the peach industry to be a perfectly competitive industry, each peach grower must have a _________ market share and produce a _________ product.

small; standardized → Producers in a competitive industry have a small market share and produce a standardized product.

Module 24: A monopoly is most likely to be temporary if the monopoly power is derived from:

technological change.

Module 26: At prices that motivate the firm to produce at all, the short-run supply curve for a perfect competitor corresponds to which curve?

the MC curve

Module 26: Suppose that Prince Puckler's Ice Cream sells 100 cones each day. It sells each cone for $3, its average variable cost is $2.50, marginal cost is $3, and the average total cost is $3.10. From this we know:

the firm is making a loss. → When price falls below average total cost, the firm makes a loss.

Module 26: Suppose that Prince Puckler's Ice Cream sells 100 cones each day. It sells the cones for $3, its average variable cost is $2.50, marginal cost is $3, and the average total cost is $3.00. From this we know:

the firm is making zero economic profits. → When price = ATC, the firm makes zero economic profit

Module 26: Suppose that Prince Puckler's Ice Cream sells 100 cones each day. It sells each cone for $3, its average variable cost is $2.50, marginal cost is $3, and the average total cost is $3.20. From this we know:

the firm will exit the industry in the long run. → Firms will exit the industry in the long run if price does not cover both fixed and variable costs. Price is below average total cost, so price does not cover average total cost.

Module 26: A perfectly competitive firm's short run supply curve is:

the marginal cost curve above the minimum of average variable cost.

Module 24: Which of the following would be considered a perfectly competitive industry?

the soybean industry in which the product is uniform and there are many buyers and sellers

Module 25: A firm's total output times the price at which it sells that output is:

total revenue.

Module 25: What is the firm's profit if the price of its product is $5 and it produces 500 units of output at a total cost of $1,000?

$1,500

Module 24: Suppose that an industry contains 4 firms with the following market shares: 50%, 25%, 15%, 10%. What is the value of the Herfindahl-Hirschman Index for this industry?

3,450

Module 24: If the market shares of the domestic automobile industry for Ford, General Motors, and Chrysler are 40%, 40%, and 20%, respectively, the Herfindahl-Hirschman Index (HHI) is

3,600. → The HHI is the sum of the market shares squared, 40^2 + 40^2 + 20^2 .

Module 25: If a firm has a total cost of $200, its profit-maximizing level of output is 10 units, and it is breaking even (that is, earning a normal profit), what is the market price? A. $200 B. $100 C. $20 D. $10 E. $2

C. $20

Module 24: Which of the following is an example of differentiated products? A. Coke and Pepsi B. automobiles and bicycles C. trucks and gasoline D. stocks and bonds E. gold and silver

Coke and Pepsi

Module 25: A firm is profitable if A. TR < TC. B. AR < ATC. C. MC < ATC. D. ATC < P. E. ATC > MC.

D. ATC < P.

Module 24: The wedding dress industry is monopolistically competitive. As a result, which condition applies to this industry?

Dresses tend to be differentiated among the many sellers serving this market.

Module 26: True or False? Gene has a lawn-mowing business. If Gene's marginal cost is $20, average total cost is $18, average variable cost is $12, and the price is $10, he should mow more lawns.

False

Module 24: True or False? If the market for pizzas is a perfectly competitive market, an individual consumer can influence the price of pizza if she stops buying pizza.

False.

Module 24: Which of the following is true for an oligopoly? I. There are a few firms, each with a large market share. II. The firms in the industry are interdependent. III. The industry experiences diseconomies of scale.

I and II only

Module 24: Which of the following is true for a monopolistically competitive industry? I. There are many firms, each with a small market share. II. The firms in the industry produce a standardized product. III. Firms are price-takers.

I only

Module 24: Which of the following is true for a monopoly? I. There is only one firm. II. The firm produces a product with many close substitutes. III. The industry has free entry and exit.

I only

Module 25: Which of the following is correct for a perfectly competitive firm? I. The marginal revenue curve is the demand curve. II. The firm maximizes profit when price equals marginal cost. III. The demand curve is horizontal.

I, II, and III

Module 24: Which of the following is true for a perfectly competitive industry? I. There are many firms, each with a large market share. II. The firms in the industry produce a standardized product. III. There are barriers to entry and exit.

II only

Module 25: If a perfectly competitive firm is producing a quantity where P < MC, then profit:

can be increased by decreasing production.

Module 24: Which of the following is an example of a standardized product?

corn → Corn is a standardized product because it is identical, regardless of who produces it.

Module 26: The state of Maine has a very active lobster industry, which harvests lobsters during the summer months. During the rest of the year, lobsters can be obtained by restaurants from producers in other parts of the world, but at a much higher price. Maine is also full of "lobster shacks," roadside restaurants serving lobster dishes that are open only during the summer. Supposing that the market demand for lobster dishes remains the same throughout the year, explain why it is optimal for lobster shacks to operate only during the summer.

This is an example of a temporary shut-down by a firm when the market price lies below the shut-down price, the minimum average variable cost. The market price is the price of a lobster meal and the variable cost is the cost of the lobster, employee wages, and other expenses that increase as more meals are served. In this example, however, it is the average variable cost curve rather than the market price that shifts over time, due to seasonal changes in the cost of lobsters. Maine lobster shacks have relatively low average variable cost during the summer, when cheap Maine lobsters are available; during the rest of the year, their average variable cost is relatively high due to the high cost of imported lobsters. So the lobster shacks are open for business during the summer, when their minimum average variable cost lies below price; but they close during the rest of the year, when the price lies below their minimum average variable cost.

Module 24: True or False? The wheat growing industry is a perfectly competitive industry because it produces a standardized product and each farmer has a very small market share.

True

Module 24: An industry with a single firm producing a product for which there are no close substitutes and which is protected by barriers to entry is:

a monopoly.

Module 24: In each of the following situations, what type of market structure do you think the industry represents? a. There are three producers of aluminum in the world, a good sold in many places. b. There are thousands of farms that produce indistinguishable soybeans to thousands of buyers. c. Many designers sell high-fashion clothes. Each designer has a distinctive style and a somewhat loyal clientele. d. A small town in the middle of Alaska has one bicycle shop.

a. oligopoly b. perfect competition c. monopolistic competition d. monopoly