econ ch 12
MC
change in cost/change in Q
oligopoly market structure
# of firms: few type of product: identical or differentiated ease of entry: low (hard to get into) examples: computers, oil, cars, aluminum
monopolistic competition market structure
# of firms: many type of product: differentiated ease of entry: high Examples: clothing stores, restaurants
perfect competition market structure
# of firms: many type of product: identical ease of entry: high examples: wheat, poultry farming (this is basically impossible)
monopoly market structure
# of firms: one type of product: unique ease of entry: entry blocked examples: electrical utility company
profit=
(P x Q) - TC and (P - ATC) x Q and TR - TC
42) What assumptions are necessary for a market to be perfectly competitive? Explain why each of these assumptions is important.
1. There are many buyers and sellers, all of whom are small relative to the market. This assumption ensures that each seller (or firm) and buyer is a price taker. A price taker cannot affect the market price. 2. All firms sell identical products. This condition excludes the possibility of any product differences which might justify different prices. Because the consumer cannot differentiate between products of different producers, any firm that charges a higher price will lose all its customers. 3. No barriers to new firms entering the market or exiting the market. This assumption guarantees that economic profits earned in the short run will be eliminated in the long run. In the long run, perfectly competitive firms will break even.
perfectly competitive market (PCM)
A market that meets the conditions of (1) many buyers and sellers, (2) all firms selling identical products, and (3) no barriers to new firms entering the market. -the actions of any single customer or firm have no impact on the market price -flat D curve for individuals
61) Why would a company continue to operate for many years while never once turning a profit rather than shut down immediately? Using revenue and cost analysis, explain when the company would shut down.
Answer: A company would continue to operate rather than shut down so long as it could cover its variable costs. If revenues did not cover all of the firm's variable costs, it would shut down.
59) What is a long-run supply curve? What does a long-run supply curve look like on a perfectly competitive market graph?
Answer: A long-run supply curve shows the relationship in the long run between market price and the quantity supplied. On a perfectly competitive market graph, the long-run supply curve is a horizontal line at the market price.
60) In the long run, perfectly competitive firms earn zero economic profit. Why do firms enter an industry when they know that in the long-run they will not earn any profit?
Answer: Even though in the long run firms earn zero profit, in the interim period they can earn economic profits. Breaking even in the long run means that a firm earns a return comparable to what it could earn in an alternative use of its resources.
58) What is meant by the term "long-run competitive equilibrium"?
Answer: Long-run competitive equilibrium refers to the situation in which the entry and exit of firms to and from a market results in the typical firm breaking even.
53) Explain two different ways to determine the profit-maximizing level of output for a firm in a perfectly competitive market.
Answer: One way is using total revenue and total cost. The profit-maximizing level of output is where the difference between total revenue and total cost is the greatest. Another way is using marginal revenue and marginal cost. The profit-maximizing level of output is where marginal revenue equals marginal cost.
44) Consider the market for wheat which is a perfectly competitive market. Is the market demand curve the same as the demand curve facing an individual producer? If not, explain how and why they are different? Illustrate your answer graphically.
Answer: The market demand is downward sloping while the demand for an individual firm's output is horizontal at the equilibrium market price. This is because an individual producer is too small to influence the market price and must take the market price as given. At the market price, the individual seller can sell all the output she desires. The figure below shows the market demand curve and the demand curve for a single firm.
52) How are market price, average revenue, and marginal revenue related for a perfectly competitive firm and why?
Answer: They are all equal to each other. The market price for any firm equals average revenue. This can be verified by noting that average revenue = total revenue ÷ quantity = (price × quantity) ÷ quantity. Further, a perfectly competitive firm faces a horizontal demand curve at the market price which means that it does not need to reduce the price to sell more. Therefore, its marginal revenue equals price.
50) If firms do not earn economic profits in a competitive equilibrium, then why would the firms choose to stay in business?
Answer: When firms earn no economic profit but earn a normal profit, they earn precisely as much as they could have earned by investing their time and money elsewhere. In other words, each producer is able to earn sufficient accounting profits to cover the opportunity cost of invested factors (time and money) and to continue operating. The source of the confusion stems from the difference between accounting and economic profits.
46) In the short run, a firm might choose to produce rather than shut down even if its market price is less than its average total cost of production.
TRUE
50) What is the difference between "shutting down temporarily" and "exiting the industry"?
The difference between the two has to do with fixed costs. In the short run a firm cannot avoid its fixed costs. When price falls so low that the firm can no longer cover its variable costs of production with the revenue it earns from selling its product it should shut down temporarily and wait for economic conditions to improve. In the long run, all costs are variable. If total revenue cannot cover all costs the firm will exit the industry.
The minimum point on the average variable cost curve is called A) the shutdown point. B) the break-even point. C) the loss-minimizing point. D) the point of diminishing returns.
a
A firm will break even when A) P = ATC. B) P > ATC. C) P < AVC. D) P = AVC.
a
A perfectly competitive market is in long-run equilibrium. At present there are 100 identical firms each producing 5,000 units of output. The prevailing market price is $20. Assume that each firm faces increasing marginal cost. Now suppose there is a sudden increase in demand for the industry's product which causes the price of the good to rise to $24. Which of the following describes the effect of this increase in demand on a typical firm in the industry? A) In the short run, the typical firm increases its output and makes an above normal profit. B) In the short run, the typical firm's output remains the same but because of the higher price, its profit increases. C) In the short run, the typical firm increases its output but its total cost also rises, resulting in no change in profit. D) In the short run, the typical firm increases its output, but its total cost also rises. Hence, the effect on the firm's profit cannot be determined without more information.
a
At the profit-maximizing level of output for a perfectly competitive firm, A) price equals marginal cost. B) average revenue equals average variable cost, and price equals marginal cost. C) marginal revenue equals marginal cost, and average total cost equals average fixed cost. D) price equals average revenue, and marginal cost equals average variable cost.
a
At the profit-maximizing level of output for a perfectly competitive firm, price equals marginal cost. Which of the following is also true? A) The difference between total revenue and total cost is the greatest. B) Total revenue equals total cost. C) Average revenue equals average total cost. D) Marginal profit equals marginal cost.
a
For a firm in a perfectly competitive market, price is A) equal to both average revenue and marginal revenue. B) equal to average revenue but greater than marginal revenue. C) greater than marginal revenue but less than average revenue. D) less than both average revenue and marginal revenue.
a
For a perfectly competitive firm, which of the following is not true at profit maximization? A) Market price is greater than marginal cost. B) Marginal revenue equals marginal cost. C) Total revenue minus total cost is maximized. D) Price equals marginal cost.
a
If a firm shuts down, it A) will suffer a loss equal to its fixed costs. B) will produce nothing but must pay its variable costs. C) will produce nothing but must pay its fixed and variable costs. D) will earn enough revenue to cover its variable costs but not all of its fixed costs.
a
If the long-run average cost curve is U-shaped, the optimal scale of production from society's viewpoint is A) the minimum efficient scale. B) where maximum economic profit is earned by producers. C) where firm profit is large enough to finance research and development. D) one which guarantees economic profit.
a
If, for a perfectly competitive firm, price exceeds the marginal cost of production, the firm should A) increase its output. B) reduce its output. C) keep output constant and enjoy the above normal profit. D) lower the price.
a
In the long run, a firm in a perfectly competitive industry will supply output only if its total revenue covers its A) explicit costs plus its implicit costs. B) fixed costs. C) implicit costs. D) explicit costs.
a
Letters are used to represent the terms used to answer this question: price (P), quantity of output (Q), total cost (TC) and average total cost (ATC). Which of the following equations is equal to a firm's average profit? A) P - ATC B) (P - ATC) × Q C) (P × Q) - TC D) P - TC
a
Mark Frost grows apples in a perfectly competitive market. If we drew a line in a graph that illustrates Mark's total revenue from selling apples, it would be A) a straight, upward-sloping line. B) a horizontal line. C) a straight, downward-sloping line. D) a curve that is negatively sloped at low levels of output and positively sloped at higher levels of output.
a
Perfect competition is characterized by all of the following except A) heavy advertising by individual sellers. B) homogeneous products. C) sellers are price takers. D) a horizontal demand curve for individual sellers.
a
Which of the following is a characteristic of an oligopolistic market structure? A) There are few dominant sellers. B) Each firm sells a unique product. C) It is easy for new firms to enter the industry. D) Each firm need not react to the actions of rivals.
a
Which of the following statements is correct? A) Economic profit takes into account all costs involved in producing a product. B) Accounting profit is not relevant in preparing the firm's financial statement. C) Economic profit always exceeds accounting profit. D) Accounting profit is the same as economic profit.
a
price taker
a buyer or seller that is unable to affect the market price -in perfectly competitive market, buyer and firms are these
sunk cost
a cost that has already been paid and cannot be recovered
long-run supply curve
a curve that shows the relationship in the long run between market price and the quantity supplied
economic profit
a firm's revenues minus all its costs, implicit and explicit
allocative efficiency
a state of the economy in which production represents consumer preferences; in particular, every good or service is produced up to the point where the last unit provides a marginal benefit to consumers equal to the marginal cost of producing it
A firm will make a profit when A) P > AVC. B) P > ATC. C) P = ATC. D) P = MC.
b
A perfectly competitive firm earns a profit when price is A) equal to minimum average total cost. B) above minimum average total cost. C) equal to minimum average variable cost. D) equal to minimum average fixed cos
b
A perfectly competitive firm in a constant-cost industry produces 1,000 units of a good at a total cost of $50,000. The prevailing market price is $48. Assuming that this firm continues to produce in the long run, what happens to output level in the long run? A) The firm's output falls. B) The firm's output increases. C) The firm produces the same output level. D) There is insufficient information to answer the question.
b
A perfectly competitive firm's short-run supply curve is A) upward sloping and is the portion of the marginal cost curve that lies above the average total cost curve. B) upward sloping and is the portion of the marginal cost curve that lies above the average variable cost curve. C) perfectly elastic at the market price. D) horizontal at the minimum average total cost.
b
A perfectly competitive wheat farmer in a constant-cost industry produces 3,000 bushels of wheat at a total cost of $36,000. The prevailing market price is $15. What will happen to the market price of wheat in the long run? A) The price remains constant at $15. B) The price falls to $12. C) The price rises above $15. D) There is insufficient information to answer the question.
b
For a perfectly competitive firm, average revenue is equal to A) marginal cost. B) the market price. C) total revenue. D) average fixed cost
b
If a firm in a perfectly competitive industry experiences persistent losses, in the long run it should A) shut down temporarily and wait for market conditions to change. B) exit the industry. C) raise its price to cover average total cost. D) continue to operate if it can raise the demand for its product through advertising and quality improvements.
b
If a firm shuts down in the short run, A) its loss equals zero. B) its loss equals its fixed cost. C) is makes zero economic profit. D) its total revenue is not large enough to cover its fixed cost.
b
If a perfectly competitive apple farm's marginal revenue exceeds the marginal cost of the last bushel of apples sold, what should the farm do to maximize its profit? A) determine what the total revenue and total cost of production are B) increase output C) decrease output D) lower its price to sell more
b
If, for a given output level, a perfectly competitive firm's price is less than its average variable cost, then the firm A) is earning a profit. B) should shut down. C) should increase output. D) should increase price.
b
In August 2008, Ethan Nicholas developed the iShoot app for the Apple iPhone 3G, and within five months had earned $800,000 from this program. By May 2009, Nicholas had dropped the price from $4.99 to $1.99 in an attempt to maintain sales. This example indicates that in a competitive market, A) earning an economic profit in the long run is extremely easy. B) earning an economic profit in the long run is extremely difficult. C) it is impossible to earn an economic profit in either the short run or the long run. D) economic profits are only earned in the long run.
b
In early 2007, Pioneer and JVC, two Japanese electronics firms, each announced that their profits were going to be lower than expected because they both had to cut prices for LCD and plasma television sets. Which of the following could explain why these firms did not simply raise their prices and increase their profits? A) The move to cut prices is probably just a temporary one to gain market share. In the long run the firms will raise prices and be able to increase their profits. B) Most likely, intense competition between these two major producers probably pushed prices down. Thereafter, each feared that it would lose its customers to the other if it raised its prices. C) In perfect competition, prices are determined by the market and firms will keep lowering prices until there are no profits to be earned. D) The firms are still making profits, just not as high as expected so there is room to lower prices until one can force the other out of business.
b
Market supply is found by A) vertically summing the relevant part of each individual producer's marginal cost curve. B) horizontally summing the relevant part of each individual producer's marginal cost curve. C) vertically summing each individual producer's average total cost curve. D) horizontally summing each individual producer's average total cost curve.
b
Max Shreck, an accountant, quit his $80,000-a-year job and bought an existing tattoo parlor from its previous owner, Sylvia Sidney. The lease has five years remaining and requires a monthly payment of $4,000. Max's explicit cost amounts to $3,000 per month more than his revenue. Should Max continue operating his business? A) Max's explicit cost exceeds his total revenue. He should shut down his tattoo parlor. B) Max should continue to run the tattoo parlor until his lease runs out. C) If Max's marginal revenue is greater than or equal to his marginal cost, then he should stay in business. D) This cannot be determined without information on his revenue.
b
The long-run supply curve for a perfectly competitive, constant-cost industry A) is upward-sloping. B) is horizontal. C) is downward-sloping. D) is found by adding up the marginal cost curves for all firms in the industry.
b
The perfectly competitive market structure benefits consumers because A) firms do not produce goods at the lowest possible price in the long run. B) firms are forced by competitive pressure to be as efficient as possible. C) firms add a much smaller markup over average cost than firms in any other type of market structure. D) firms produce high-quality goods at low prices.
b
The price a perfectly competitive firm receives for its output A) is determined by the interaction of the firm and all of the consumers who buy from the firm. B) is determined by the interaction of all sellers and all buyers in the firm's market. C) will not change in response to changes in market demand and supply because the firm is a price taker. D) will be lowered by the firm in order to sell more output.
b
What is the relationship among the following variables for a perfectly competitive firm: the market price, average revenue and marginal revenue? A) Average revenue is equal to the market price; average revenue is greater than marginal revenue. B) The market price is equal to both average revenue and marginal revenue. C) Average revenue is equal to marginal revenue; average revenue is greater than the market price. D) As a firm lowers the market price to sell more output, marginal revenue and average revenue will be less than the market price.
b
When plasma television sets were first introduced prices were high and few firms were in the market. Later, economic profits attracted new firms and the price of plasma televisions fell. This example illustrates A) a decreasing-cost industry. B) that consumers receive this new technology "free of charge" in the sense that they only have to pay a price for plasma televisions equal to the lowest production cost. C) an industry with a low minimum efficient scale. D) how fickle consumer demands are.
b
Which of the following describes a situation in which every good or service is produced up to the point where the last unit provides a marginal benefit to consumers equal to the marginal cost of producing it? A) productive efficiency B) allocative efficiency C) marginal efficiency D) profit maximization
b
how do consumers benefit from productive efficiency?
b. Productive efficiency means that a product is produced at the lowest possible cost. In other words, the product is produced with a minimum amount of scarce resources. Consumers benefit because society can produce more products with its scarce resources.
1) If the market price is $25, the average revenue of selling five units is A) $5. B) $12.50. C) $25. D) $125.
c
3) Which of the following is not true for a firm in perfect competition? A) Profit equals total revenue minus total cost. B) Price equals average revenue. C) Average revenue is greater than marginal revenue. D) Marginal revenue equals the change in total revenue from selling one more unit.
c
A constant-cost industry is an industry in which A) average costs fall as the industry expands output. B) average costs rise as the industry expands output. C) average costs remain constant as the industry expands output. D) input prices rise at a constant rate as firms in the industry use more inputs.
c
A firm could continue to operate for years without ever earning a profit as long as it is producing an output where A) MR < ATC. B) ATC > AVC. C) MR > AVC. D) AFC < AVC.
c
A perfectly competitive firm produces 3,000 units of a good at a total cost of $36,000. The fixed cost of production is $20,000. The price of each good is $10. Should the firm continue to produce in the short run? A) No, it should shut down because it is making a loss. B) Yes, it should continue to produce because its price exceeds its average fixed cost. C) Yes, it should continue to produce because the firm's revenues cover the total variable cost of $16,000. D) There is insufficient information to answer the question.
c
A perfectly competitive firm's marginal revenue A) is greater than its price. B) is less than price because a firm must lower its price to sell more. C) is equal to its price. D) may be either greater or less than its price, depending on the quantity sold.
c
A perfectly competitive firm's supply curve is its A) marginal cost curve. B) marginal cost curve above its minimum average total cost. C) marginal cost curve above its minimum average variable cost. D) marginal cost curve above its minimum average fixed cost.
c
An individual seller in perfect competition will not sell at a price lower than the market price because A) demand for the product will exceed supply. B) the seller would start a price war. C) the seller can sell any quantity she wants at the prevailing market price. D) demand is perfectly inelastic.
c
Assume that price is greater than average variable cost. If a perfectly competitive seller is producing at an output where price is $11 and the marginal cost is $14.54, then to maximize profits the firm should A) continue producing at the current output. B) produce a larger level of output. C) produce a smaller level of output. D) There is not enough information given to answer the question.
c
Both individual buyers and sellers in perfect competition A) can influence the market price by their own individual actions. B) can influence the market price by joining with a few of their competitors. C) have to take the market price as a given. D) have the market price dictated to them by government.
c
How are sunk costs and fixed costs related? A) They are not related in any way. B) Sunk costs cannot be recovered and fixed costs can be avoided by shutting down. C) In the short run they are equal to each other. D) In the long run they are equal to each other.
c
If in a perfectly competitive market, firms are facing a price below their average total cost but above average variable cost at the profit-maximizing output, then A) the industry supply will not change. B) new firms are attracted to the industry. C) some existing firms will exit the industry. D) firms are breaking even.
c
If productive efficiency characterizes a market A) the marginal cost of production is minimized. B) firms produce the goods that consumers desire most. C) the output is being produced at the lowest possible cost. D) firms use the best technology available to produce the good.
c
If the market price is $40, the average revenue of selling five units is A) $8. B) $20. C) $40. D) $200.
c
If total variable cost exceeds total revenue at all output levels, a perfectly competitive firm A) should produce in the short run. B) is making short-run profits. C) should shut down in the short run. D) has covered its fixed cost.
c
In a perfectly competitive industry, in the long-run equilibrium, A) the typical firm is producing at the output where its long-run average total cost is not minimized. B) the typical firm is earning an accounting profit greater than its implicit costs. C) the typical firm earns zero profit. D) the typical firm is maximizing its revenue.
c
In long-run perfectly competitive equilibrium, which of the following is false? A) There is efficient, low-cost production at the minimum efficient scale. B) Economic surplus is maximized. C) Firms earn economic profit. D) Economies of scale are exhausted.
c
Suppose the equilibrium price in a perfectly competitive industry is $15 and a firm in the industry charges $21. Which of the following will happen? A) The firm's profits will increase. B) The firm's revenue will increase. C) The firm will not sell any output. D) The firm will sell more output than its competitors.
c
Suppose the fixed cost of production rises by $500 and the price per unit is still $8. What happens to the firm's profit-maximizing output level? A) It must fall. B) It must rise to offset the increased cost. C) It will remain the same. D) The firm will shut down.
c
The price of a seller's product in perfect competition is determined by A) the individual seller. B) a few of the sellers. C) market demand and market supply. D) the individual demander.
c
The supply curve of a perfectly competitive firm in the short run is A) the firm's average variable cost curve. B) the portion of the firm's marginal cost curve below the minimum point of the average variable cost curve. C) the portion of the firm's marginal cost curve above the minimum point of the average variable cost curve. D) the portion of the firm's marginal cost curve above the minimum point of the average total cost curve.
c
To maximize profit, a perfectly competitive firm A) should sell the quantity of output determined by the interaction between industry demand and supply. B) should sell the quantity of output that results in a value for total revenue that is equal to total cost. C) should produce the quantity of output that results in the greatest difference between total revenue and total cost. D) should produce the quantity of output that results in the greatest difference between marginal revenue and marginal cost.
c
Why is the total revenue curve a ray from the origin? A) because revenue increases at an increasing rate B) because revenue increases at a decreasing rate C) because the firm can sell its product at a constant price D) because the firm must lower its price to sell more
c
Writing in the New York Times on the technology boom of the late 1990s, Michael Lewis argues, "The sad truth, for investors, seems to be that most of the benefits of new technologies are passed right through to consumers free of charge." What does Lewis means by the benefits of new technology being "passed right through to consumers free of charge"? A) Firms in perfect competition are price takers. Since they cannot influence price, they cannot dictate who benefits from new technologies, even if the benefits of new technology are being "passed right through to consumers free of charge." B) In perfect competition, price equals marginal cost of production. In this sense, consumers receive the new technology "free of charge." C) In the long run, price equals the lowest possible average cost of production. In this sense, consumers receive the new technology "free of charge." D) In perfect competition, consumers place a value on the good equal to its marginal cost of production and since they are willing to pay the marginal valuation of the good, they are essentially receiving the new technology "free of charge."
c
or a perfectly competitive firm, at profit maximization, A) market price exceeds marginal cost. B) total revenue is maximized. C) marginal revenue equals marginal cost. D) production must occur where average cost is minimized.
c
A constant-cost, perfectly competitive market is in long-run equilibrium. At present, there are 1,000 firms each producing 400 units of output. The price of the good is $60. Now suppose there is a sudden increase in demand for the industry's product which causes the price of the good to rise to $64. In the new long-run equilibrium, how will the average total cost of producing the good compare to what it was before the price of the good rose? A) The average total cost will be higher than it was before the price increase since the increase in demand will drive up input prices. B) The average total cost will be lower than it was before the price increase because of economies of scale. C) The average total cost will be higher than it was before the price increase because of diseconomies of scale arising from the increased demand. D) The average total cost will be the lower than it was before the price increase as output increases.
d
Assume that the 4K and OLED television sets industry is perfectly competitive. Suppose a producer develops a successful innovation that enables it to lower its cost of production. What happens in the short run and in the long run? A) Initially, the firm will be able to increase its profit significantly, but in the long run its profits will still be greater than zero but lower than its short-run profits because other firms would also innovate. B) The firm will probably incur losses temporarily because of the high cost of the innovation, but in the long run it will start earning positive profits. C) This firm will be able to earn above normal profits indefinitely if it obtains a patent for its innovation. D) The firm will be able to increase its economic profits temporarily, but in the long run its economic profits will be eliminated as other firms copy the innovation.
d
Assume that the medical screening industry is perfectly competitive. Consider a typical firm that is making short-run losses. Suppose the medical screening industry runs an effective advertising campaign which convinces a large number of people that yearly CT scans are critical for good health. How will this affect a typical firm that remains in the industry? A) The firm's supply curve shifts right and its marginal revenue curve shifts upwards as the market price rises and ultimately the firm starts making profits. B) The firm's marginal revenue curve and average cost curve shift upwards in response to the increase in market price and advertising expenditure. The firm increases output until it starts breaking even. C) The marginal revenue curve shifts upwards, the firm's output increases along its marginal cost curve, it expands production and eventually starts making profits. D) The marginal revenue curve shifts upwards, the firm's output increases along its marginal cost curve, it expands production until it breaks even.
d
Firms in perfectly competitive industries are unable to control the prices of the products they sell and earn a profit in the long run. Which of the following is one reason for this? A) Owners of perfectly competitive firms realize that their short-run profits are temporary. Therefore, they either sell their businesses or develop other products that will earn short-run profits. B) Firms in perfectly competitive industries can use advertising in the short run to persuade consumers that their products are better than those of other firms. But eventually consumers realize that all of the firms sell virtually identical products. C) Firms from other countries are able to produce similar products at lower costs. D) Firms in these industries sell identical products.
d
If a perfectly competitive firm achieves productive efficiency then A) it will raise its price in order to earn an economic profit. B) the price of the good it sells is equal to the benefit consumers receive from consuming the last unit of the good sold. C) it is producing at minimum efficient scale. D) it is producing the good it sells at the lowest possible cost.
d
If total revenue exceeds fixed cost, a firm A) should produce in the short run. B) has covered its variable cost. C) is making short-run profits. D) may or may not produce in the short run, depending on whether total revenue covers variable cost.
d
In a graph that illustrates a perfectly competitive firm, the marginal revenue curve is A) a diagonal line that lies below the firm's demand curve. B) a line that intersects the firm's demand curve from below at its lowest point. C) a line that intersects the firm's average total cost curve from below at its lowest point. D) the same as the firm's demand curve.
d
In a graph with output on the horizontal axis and total revenue on the vertical axis, what is the shape of the total revenue curve for a perfectly competitive seller? A) U-shaped B) inverted U-shaped C) a horizontal line D) a ray from the origin
d
In perfect competition, A) the market demand curve and the individual's demand curve are identical. B) the market demand curve is perfectly inelastic while demand for an individual seller's product is perfectly elastic. C) the market demand curve is perfectly elastic while demand for an individual seller's product is perfectly inelastic. D) the market demand curve is downward sloping while demand for an individual seller's product is perfectly elastic.
d
In the long run, the entry of new firms in an industry A) harms consumers by forcing prices up above the level of average cost B) benefits consumers by forcing prices down to the level of total cost. C) harms consumers by forcing prices up above the level of total cost D) benefits consumers by forcing prices down to the level of average cost.
d
Some markets have many buyers and sellers but fall into the category of monopolistic competition rather than perfect competition. The most common reason for this is A) there are high barriers to entering these markets. B) firms in these markets sell identical products. C) firms in these markets make high profits. D) firms in these markets do not sell identical products.
d
Which of the following describes a difference between allocative efficiency and productive efficiency in a perfectly competitive market? A) Allocative efficiency is achieved only in the long run. Productive efficiency is achieved only in the short run. B) Allocative efficiency is achieved only in the long run. Productive efficiency is achieved in the short run and the long run. C) Allocative efficiency is achieved only in the short run. Productive efficiency is achieved only in the long run. D) Allocative efficiency is achieved in the short run and the long run. Productive efficiency is achieved only in the long run.
d
Which of the following does not hold true for a perfectly competitive firm in long-run equilibrium? A) Its economic profit will be zero. B) It will minimize average total cost. C) It will charge a price equal to marginal cost. D) Marginal cost will be minimized.
d
Which of the following is not a characteristic of a monopolistically competitive market structure? A) There is a large number of independently acting small sellers. B) All sellers sell products that are differentiated. C) There are low barriers to entry of new firms. D) Each firm must react to actions of other firms.
d
Which of the following is not an option for a perfectly competitive firm that suffers short-run losses? A) shutting down B) reducing production C) reducing the use of variable factors D) raising the price
d
Which of the following statements is true? A) A long-run competitive equilibrium can only be achieved in constant-cost industries. B) When an industry achieves a long-run competitive equilibrium, industry output will not change in the future. C) A long-run competitive equilibrium outcome is not economically efficient. D) When an industry reaches a long-run competitive equilibrium, the typical firm in the industry breaks even.
d
22) Firms in perfect competition produce the productively efficient output level in the short run and in the long run.
false
39) Perfectly competitive industries tend to produce low-priced, low-technology products.
false
40) In the short run, a firm that incurs losses might choose to produce rather than shut down if the amount of its revenue is less than its fixed cost.
false
47) In the short run, if price falls below a firm's minimum average total cost, then the firm should shut down.
false
48) A perfectly competitive firm's marginal revenue curve is downward sloping.
false
49) Assume that price is greater than average variable cost. If a perfectly competitive firm is producing at an output where price is $114 and the marginal cost is $102, then the firm is probably producing more than its profit-maximizing quantity.
false
50) Being a price taker, a perfectly competitive firm cannot receive a producer surplus in the short run.
false
how to tell if an industry is in a long-run equilibrium
if it does not earn an economic profit
how can you tell from a graph if a firm is perfectly competitive?
if the MR is horizontal - The perfectly competitive firm is a price taker and therefore faces a perfectly elastic demand curve which is also the MR curve.
How a Firm Maximizes Profit in a Perfectly Competitive Market
produce output (Q) up to the point in which MR> or equal to MC
marginal revenue (MR)
the change in total revenue from selling one more unit of a product MR= change in TR/change in Q
if p=atc
the firm is breaking even
if p<atc
the firm is making a loss
if p>atc
the firm is making a profit
shutdown point
the minimum point on a firm's average variable cost curve; if the price falls below this point, the firm shuts down production in the short run
economic loss
the situation in which a firm's total revenue is less than its total cost, including all implicit costs
productive efficiency
the situation in which a good or service is produced at the lowest possible cost
long-run competitive equilibrium
the situation in which the entry and exit of firms has resulted in the typical firm breaking even
average revenue (AR)
total revenue divided by the quantity of the product sold AR= TR/Q
25) A perfectly competitive firm in long-run equilibrium produces output at the lowest possible average total cost.
true
42) If a firm shuts down in the short run, its maximum loss equals the amount of its fixed cost.
true
45) A perfectly competitive firm breaks even at a price equal to its minimum average total cost.
true
48) The short-run supply curve for a perfectly competitive firm is that part of the firm's marginal cost curve that lies above the minimum point of its average variable cost curve.
true
51) For a perfectly competitive firm, average revenue equals marginal cost at the profit-maximizing output.
true
51) Suppose there are economies of scale in the production of a specialized memory chip that is used in manufacturing microwaves. This suggests that the microwave industry is a decreasing-cost industry.
true
52) In an increasing-cost industry the long-run supply curve is upward sloping.
true
An increase in a firm's fixed cost will not change the firm's profit-maximizing output in the short run.
true
if P < AVC, do you stop producing?
yes