Economics Chapter 23: Homework
Even though one firm produces a large portion of the industry's total output, there are many firms in the industry, and their products are indistinguishable. Firms can easily exit and enter the industry.
A perfectly competitive industry has four fundamental characteristics: (1) there is a large number of buyers and sellers so that each seller produces a very small portion of the industry output, (2) firms in the industry produce and sell a homogeneous product, (3) information is equally accessible to both buyers and sellers, and (4) there are insignificant barriers to industry entry or exit. These characteristics imply that each firm in a perfectly competitive industry is a price taker, meaning that the firm takes the market price as given and outside its control. Since in this case, one firm produces a large portion of the industry's total output it is not a perfectly competitive industry. This example violates characteristic number (1) there is a large number of buyers and sellers,
When the perfect competitor earns less than normal profits in the long run, the firm will
A. exit the industry.
In the figure to the right, the firm should produce
All these output levels result in economic profits, but the firm will seek the output level where economic profits are the greatest. 10 units since economic profits are the greatest. where output and revenue are vertically lined
The role of profits in the model of perfect competition is to
B. signal entrepreneurs to enter the industry. X The existence of economic profits provide a signal that is worthwhile for people to invest in an industry.
For a perfectly competitive firm, price
Price does equal marginal revenue and average revenue, and may equal ATC if the firm is earning a normal profit. However price does not have to equal ATC. equals both average revenue and marginal revenue.
Zero economic profits means
Economic profits = total revenue minus (explicit costs plus implicit costs). If a firm is making sufficient revenues to cover all costs, it is breaking even, earning zero economic profits. This is also described as a normal profit. B. the firm is covering all of its opportunity costs and will stay in business.
Consider the diagram at right, which applies to a perfectly competitive firm, which at present faces a market clearing price of $20 per unit and produces 10,000 units of output per week. I. What is the firm's current average revenue per unit? II. What are the present economic profits of this firm? III. Is the firm maximizing economic profits? IV. If the market clearing price drops to $12.50 per unit the firm should V. If the market clearing price drops to $7.50 per unit the firm should
I. Total Revenue = price x quantity of output and so the average revenue per unit is the same as the price ($20). II. The economic profits are the price minus the average total cost multiplied by the output level The economic profits are the price of $20 minus the average total cost of $15.25 multiplied by the output level of: 10,000 = $4.75 times 10,000 = $47,500 III. To determine whether the firm should produce in the short-run, compare the price with average total cost and average variable cost. If the price equals the average total cost, the firm breaks even earning a zero economic profit, or a normal profit. If the price is less than the average total cost, but greater than the average variable cost, the firm will have a loss in the short-run, but should still operate because its average variable costs are covered by the price of the product. Loss will be minimized by producing the output level where marginal revenue equals marginal cost. In this case, the loss will be less than the fixed cost the firm would lose if it shuts down. Yes, they are producing where the marginal revenue equals the marginal cost. IV. In situations in which the price is less than the average total costs, but the price is greater than or equal to average variable cost, profit maximization is equivalent to loss minimization. The loss minimizing output occurs where marginal cost equals marginal revenue. .all of the above V. All of the above.
Consider the short-run cost curves shown on the graph. The U-shaped curve is a perfectly competitive firm's short-run average variable cost curve, and the upward-sloping curve is its marginal cost curve. The market price is equal to $30. What is the firm's profit-maximizing output in the short run?
In a perfectly competitive industry, the short-run shutdown price is the point at which the marginal cost curve crosses through the short-run average variable cost curve. This is a price of $35 per unit on the graph. Thus, if the market price is $30 per unit, the firm should shut down and produce no output in the short run. D. 0
Which of the following is not one of the assumptions of a perfectly competitive market?
The characteristics of a perfectly competitive industry include: both buyers and sellers have equal access to information. A. Better information for producers than consumers.
The demand curve for the perfect competitor is horizontal because
The demand schedule for a perfectly competitive firm is the going market price as determined by the forces of market supply and market demand. That is where the market demand curve intersects the market supply curve. C. the market dictates each firm's price.
The demand curve for the perfectly competitive firm is
The firm can sell all it wants at a given price. The firm's demand curve is horizontal, or perfectly elastic. C. perfectly elastic
Suppose that a perfectly competitive firm faces a market price of $5 per unit, and at this price the upward-sloping portion of the firm's marginal cost curve crosses its marginal revenue curve at an output level of 1,500 units. If the firm produces 1,500 units, its average variable costs equal $5.50 per unit, and its average fixed costs equal $0.50 per unit. What is the firm's profit-maximizing (or loss-minimizing) output level? What is the amount of its economic profits (or losses) at this output level?
The firm will maximize profits or minimize losses by producing where MR = MC. = 1500 Economic profit per-unit is AR minus ATC. Total economic profit is TR minus TC or (profit per-unit times output). =-1500
The following table contains output and marginal cost data for points above minimum average variable for a typical firm in a perfectly competitive industry. Output MC 5 3 6 4 7 5 8 6 9 7 10 8 Using the line drawing tool and the data above, draw 3 industry supply curves assuming there are 10, 15 and 20 firms. Label these lines S1, S2 and S3, respectively. As the number of firms increases, industry supply becomes relatively
The industry supply curve is the horizontal sum of all of the individual firms' marginal cost curves at and above their respective minimum average variable cost points. According to the cost data, the marginal cost curve is linear at and above the minimum average variable cost point. Therefore, you only need to plot two points on the supply curve (the two endpoints). Hint: The quantity at each point will be the output of an individual firm multiplied by the number of firms 3 points, all at 3 vertical, moving to the right all up towards point of 8 more elastic
Suppose that a firm in a perfectly competitive industry finds that at its current output rate, marginal revenue exceeds the minimum average total cost of producing any feasible rate of output. Furthermore, the firm is producing an output rate at which marginal cost is less than the average total cost at that rate of output. Is the firm maximizing its economic profits?
The marginal cost is less than the average cost, so the average cost must be declining at the output level where the firm is producing. Since the marginal revenue exceeds the minimum average total cost of producing for some feasible rate of output, if the firm was maximizing its economic profits the marginal cost must also exceed the minimum average total cost for some feasible rate of output. Therefore, if the firm was maximizing its economic profits both the marginal revenue and the marginal cost would be greater than the average total cost at that rate of output. In this case, the firm is producing an output rate at which marginal cost is less than the average total cost at that rate of output. No, if the firm was maximizing its economic profits the marginal cost would not be less than the average total cost at that rate of output.
There are many buyers and sellers in the industry. Consumers have equal information about the prices of firms' products, which differ slightly in quality from firm to firm.
This example violates characteristic number (2) firms in the industry produce and sell a homogeneous product,
Many taxicabs compete in a city. The city's government requires all taxicabs to provide identical service. Taxicabs are virtually identical, and all drivers must wear a designated uniform. The government also limits the number of taxicab companies that can operate within the city's boundaries.
This example violates characteristic number (4) there are insignificant barriers to industry entry or exit.
In a perfectly competitive market, if P = ATC in the long run, the firm will
When P = ATC there are zero economic profits. When P = ATC there are zero economic profits. The firm is breaking even, and there are no losses. D. None of the above.
With marginal cost pricing,
When an individual pays a price equal to the marginal cost of production, the cost to the user of that product is equal to the sacrifice or cost to society of producing that quantity of that good as opposed to more of some other good. A. the price charged is equal to the opportunity cost to society of producing one more unit of the good.
At the long-run equilibrium the firm's average total cost is
Long-run costs are zero only when no production occurs. Because profits must be zero in the long run, the firm's short-run average costs (SAC) must equal P at the minimum SAC. In addition, in long-run equilibrium, any economies of scale must be exhausted, and P must equal the minimum point of the long-run average cost curve (LAC). B. minimized.
Suppose that the market price in a perfectly competitive industry is $
Remember, in a perfectly competitive industry, each firm's marginal revenue is equal to the market price at any given output rate. Draw horizontal line straight across, starting at cost point