Econ Ch.9

Refer to figure 9.1. The good is sold in a perfectly competitive market. If the market price of the good is $150 at the profit maximizing level of output, total profit is:

$30,000

Refer to figure 9.1. Total fixed cost is:

$4,000

Refer to Figure 9.1. At a price of $75, the profit maximizing level of output is:

0

Farmer Brown sells her wheat in a perfectly competitive market. Suppose the current market price of wheat is $2.50 per bushel. If farmer Brown charges $2.51 for her wheat:

Farmer Brown will sell no bushels of wheat.

Explain why perfectly competitive firms make zero economic profit in the long-run.

Firms earn zero profit because they must accept the market price with- out having any influence over it, and other firms may freely enter the market. Ifprofits are being earned firms will ent,er and drive the price down. If firms are earning a loss they will leave the industry and the price .;-ill rise ant.il no one is losing money. The firms may be able to increase their profits by expanding the scale of their operation. So in the long run equilibrium, firms will be at the minimum of their long run average cost curve. Recall that the market is large enough relative to the firms to obsorb any output firms are wdling to supply at the market price. In the case where a firms LRAC curve is downward slop ing over the entire range where demand exists, the industry will tend towards monopoly.

The supply curve for a perfectly competitive market:

Is the summation of all the marginal cost curves, above the minimum of the average variable cost curve, from all the individual firms in the market.

Long-run equilibrium for a perfectly competitive industry occurs when:

P=MC=ATC

A firm will not shut down in the short-run as long as:

Price exceeds average variable cost at the level of output where marginal revenue equals marginal cost.

Because individual firms cannot affect the market price of their good, for each firm in a competitive market:

Price is equal to marginal revenue.

A perfectly competitive industry is in long-run equilibrium. If demand for the product increases, we can expect the price of the good to :

Rise at first and then fall.

A perfectly competitive firm can:

Sell as much as it can produce at the market price.

Firms in a perfectly competitive market:

Sell homogeneous products, like wheat or corn.

Which of the following is NOT a characteristic of a perfectly competitive market?

Substantial barriers to entry.

If the market demand increases for a good sold in a perfectly competitive market, individual firms in the market:

Will be able to charge a higher price for their product.

Your firm is producing a good in a perfectly competitive market. If you know that when you produce 250 units per day, your total costs are $1000 and when you produce 251 units your total costs are $1010, then if the market price of your good is $5:

You will be able to increase firm profits by decreasing output.

Your firm is producing a good in a perfectly competitive market. If you know that when you produce 300 units per day, your total costs are $7000 and when you produce 301 units your total costs are $7001, then:

You will be able to increase firm profits by increasing output if the market price of your good is $5.

Refer to Figure 9.1. The good is sold in a perfectly competitive market. If the market price of the good is $150, the profit maximizing level of output is:

200

You notice that the price of butter rises and then falls. The best explanation for this is that:

Demand for butter increased causing price to rise which attracted other firms to enter the market causing supply to increase which caused the price to go back down.

Suppose Tim's Cowboy boot factory produces in a perfectly competitive market. Suppose the average total cost of cowboy boots is $65, the average variable cost of cowboy boots is $60, and the price of cowboy boots is $62. If the firm is producing the level of output where marginal cost equals price, then in the short-run:

The firm should continue to produce since total revenue exceeds total variable cost.

Refer to Figure 9.1. The firm's short-run supply curve is:

The marginal cost curve above $100.