Unit 6: Market Structure (1) -- Firms in Competitive Markets

Assume a firm in a competitive industry is producing 800 units of output, and it sells each unit for $6. Its average total cost is $4. Its profit is

$1,600.

Refer to the below diagram. At the profit-maximizing output, total variable cost is equal to:

0CFE.

Suppose the market for wheat is perfectly competitive. Fed up with low prices, a wheat grower in Texas decides he won't take his output to market and, instead, dumps all his wheat into the Red River. What happens to the market price of wheat?

It doesn't change.

The demand curve in a purely competitive industry is ______, while the demand curve to a single firm in that industry is ______.

downsloping, perfectly elastic

Refer to Figure 14-14. If the market starts in equilibrium at point Z in panel (b), a decrease in demand will ultimately lead to

fewer firms in the market.

Refer to the below diagram for a purely competitive producer. The firm will produce at a loss at all prices:

between P2 and P3.

Refer to the below diagram. At P2, this firm will:

produce 44 units and earn only a 0 profit.

A competitive market is in long-run equilibrium. If demand increases, we can be certain that price will

rise in the short run. Some firms will enter the industry. Price will then fall to reach the new long-run equilibrium.

Refer to the below diagram. At P4, this firm will:

shut down in the short run.

Refer to the below diagram for a purely competitive producer. The firm's short-run supply curve is:

the bcd segment and above on the MC curve.

When price is greater than marginal cost for a firm in a competitive market,

there are opportunities to increase profit by increasing production.

A sunk cost is one that

was paid in the past and will not change regardless of the present decision.

Mrs. Smith operates a business in a competitive market. The current market price is $8.50. At her profit-maximizing level of production, the average variable cost is $8.00, and the average total cost is $8.25. Mrs. Smith should

continue to operate in both the short run and long run.

If firms are losing money in a purely competitive industry, then in the long run this situation will shift the industry:

Supply curve to the left, and the market price will increase

Refer to the below graphs. Which statement is true?

The firm is experiencing economic losses

What is the lowest price at which this firm might choose to operate?

$3

Refer to the below diagram. At the profit-maximizing output, total fixed cost is equal to:

BCFG

Refer to Table 14-17. Using this information, determine the average variable cost (AVC) when Q = 5.

$6.

When a certain competitive firm produces and sells 100 units of output, marginal revenue is $80. When the same firm produces and sells 200 units of output, what is average revenue?

$80

When a profit-maximizing firm is earning profits, those profits can be identified by

(P - ATC) × Q.

Refer to Figure 14-13. If the price is $2 in the short run, what will happen in the long run?

Individual firms will earn negative economic profits in the short run, which will cause some firms to exit the industry.

Refer to Figure 14-13. If the price is $3.50 in the short run, what will happen in the long run?

Individual firms will earn negative economic profits in the short run, which will cause some firms to exit the industry.

Refer to the below diagram for a purely competitive producer. The lowest price at which the firm should produce (as opposed to shutting down) is:

P2.

A purely competitive firm, as shown below, will face what kind of change in profits over the long run, assuming industry demand is constant?

Profits will decrease

If firms enter a purely competitive industry, then in the long run this change will shift the industry:

Supply curve to the right, and the market price will decrease

Refer to the below diagram. At P3, this firm will

produce 40 units and incur a loss.

Refer to Figure 14-1. If the market price is $6.30, the firm will earn

zero economic profits in the short run.

​Refer to Table 14-17. Based upon this information, the profit maximizing output level is

​5 units.

Refer to the below diagram. To maximize profit this firm will produce:

E units at price A.

Refer to the below diagram. This firm will earn a positive profit if product price is:

P1.

An individual firm in a perfectly competitive market:

cannot affect market price.

In the transition from the short run to the long run, the number of firms in a competitive industry is

able to adjust to market conditions.

Refer to the below diagram. At the profit-maximizing output, total revenue will be:

0AHE.

Refer to the below graphs. What will happen in the long run to industry supply and the equilibrium price of the product?

S will decrease, P will increase

Refer to the below diagram. At the profit-maximizing output, the firm will realize:

a profit of ABGH.

When new firms have an incentive to enter a competitive market, their entry will

drive down profits of existing firms in the market.

Refer to the below diagram for a purely competitive producer. If product price is P3

economic profits will be zero.

Laura is a gourmet chef who runs a small catering business in a competitive industry. Laura specializes in making wedding cakes. Laura sells 20 wedding cakes per month. Her monthly total revenue is $5,000. The marginal cost of making a wedding cake is $200. In order to maximize profits, Laura should

make more than 20 wedding cakes per month.

Mr. Rogers sells colored pencils. The colored-pencil industry is competitive. Mr. Rogers hires a business consultant to analyze his company's financial records. The consultant recommends that Mr. Rogers increase his production. The consultant must have concluded that Mr. Roger's

marginal revenue exceeds his marginal cost.

By comparing marginal revenue and marginal cost, a firm in a competitive market is able to adjust production to the level that achieves its objective, which we assume to be

maximizing profit.