Week 8
In a perfectly competitive market, which of the following statements is true? A) In the long run, the price will change to reflect whatever change we observe in production cost B) The existence of profits leads firms to exit the industry, while losses lead firms to enter the industry C) In the long run, economic profits are positive D) Perfect competition generates prices greater than marginal costs
A
At the profit-maximizing level of output for a perfectly competitive firm, A) price equals marginal cost B) price equals average revenue and marginal cost equals average variable cost C) marginal revenue equals marginal cost and average total cost equals average fixed cost D) average revenue equals average variable cost and price equals marginal cost
A
TR < TC
firm incurs a loss
If the market price is below minimum average total cost for an extended period,
firms will exit the industry in the long run
A producer chooses output according to the optimal output rule
produce the quantity at which marginal revenue equals marginal cost. For a price-taking firm, marginal revenue is equal to price and its marginal revenue curve is a horizontal line at the market price. It chooses output according to the price-taking firm's optimal output rule: produce the quantity at which price equals marginal cost.
Monopoly
one firm, unique/differentiated products, entry blocked, market power, eg first class mail delivery, tap water
Suppose that some firms in a perfectly competitive industry earn negative economic profits. In the long run: A) Industry supply curve will not shift B) Industry supply curve will shift to the left C) Number of firms in the industry will not change D) Number of firms in the industry will increase
B
Which of the following is the best example of a perfectly competitive industry? A) airplane production B) electricity production C) wheat production D) steel production
C
If the price is greater than average total cost at the profit-maximizing quantity of output in the short run, a perfectly competitive firm will: A) Produce at a loss B) Produce at a profit C) Shut down production D) Produce more than the profit-maximizing quantity
B
In a long-run equilibrium, economic profits in a perfectly competitive industry are: A) Positive B) Zero C) Negative D) Indeterminate
B
A price-taking producer
a producer whose actions have no effect on the market price of the good or service it sells
Productive efficiency
a situation in which a good or service is produced at the lowest possible cost
Break-even price of a price-taking firm is the market price
at which it earns zero profits
The short-run supply curve for a perfectly competitive firm has its: A) Demand curve above its marginal revenue curve B) Marginal revenue curve to the right of its marginal cost curve C) Marginal cost curve above its average variable cost curve D) Average total cost curve below its marginal cost curve
C
Which of the following is not a characteristic of a perfectly competitive industry? A) Firms seek to maximize profits B) Profits may be positive in the short run C) There are many firms D) There are differentiated products
D
A perfectly competitive firm will incur an economic loss but will continue to produce the profit-maximizing quantity of output in the short run if the price is: A) Less than marginal cost B) Less than average variable cost C) Greater than average total cost D) Greater than average variable cost and less than average total cost
D
A perfectly competitive firm's marginal revenue A) may be either greater or less than price, depending on the quantity sold B) may be either greater or less than price, depending on the quantity sold C) is less than price because a firm must lower its price to sell more D) is equal to price
D
In a perfectly competitive market...
all producers are price-taking producers and all consumers are price-taking consumers - no one's actions can influence the market price
If the market price is above minimum average total cost
existing firms are profitable and new firms will enter the industry in the long run
Oligopoly
few firms, identical or differentiated products, low ease of entry, market power, eg manufacturing computers and manufacturing automobiles
TR>TC
firm is profitable
Long-run market equilibrium
given by the intersection of the long-run industry supply curve and the demand curve- no producer has an incentive to enter or exit.
Perfect competition results in
productive efficiency
Price-taking firm's optimal
says that a price- taking firm's profit is maximized by producing the quantity of output at which the marginal cost of the last unit produced is equal to the market price.
Optimal output rule
says that profit is maximized by producing the quantity of output at which the marginal revenue of the last unit produced is equal to its marginal cost
Short-run individual supply curve
shows how an individual producer's optimal output quantity depends on the market price, taking fixed cost as given.
Marginal revenue curve
shows how marginal revenue varies as output varies
Industry supply curve
shows the relationship between the price of a good and the total output of the industry as a whole
There are two necessary conditions for a perfectly competitive industry:
there are many producers, none of whom have a large market share, and the industry produces a standardized product or commodity - goods that consumers regard as equivalent // free entry and exit into and from the industry
A firm is profitable if
total revenue exceeds total cost or if the market price exceeds its break-even price-minimum average total cost
TR=TC
firm breaks even
A price-taking consumer
is a consumer whose actions have no effect on the market price of the good or service he or she buys
long-run industry supply curve
is often horizontal. It may slope upward if there is limited supply of an input. It is always more elastic than the short-run industry supply curve.
Long-run industry supply curve
is the industry supply curve given sufficient time for entry into and exit from the industry
The industry supply curve depends
on the time period
What are the two necessary conditions for perfect competition?
- an industry can be perfectly competitive only if consumers regard the products of all producers as equivalent (a good is a standardized product, also known as a commodity, when consumers regard the products of different producers as the same good) - there is free entry and exit into and from an industry (there are no barriers to entry/ the industry contains many producers, none of whom have a large market share. A producer's market share is the fraction of the total industry output accounted for by that producer's output.
Free entry and exit ensures
- the number of producers in an industry can adjust to changing market conditions - producers in an industry cannot artificially keep other firms out
A perfectly competitive apple farm produces 1,000 bushels of apples at a total cost of £36,000. The price of each bushel is £50. Calculate the firm's short-run profit or loss. A) There is insufficient information to answer the question B) profit of £50,000 C) profit of £14,000 D) loss of £14,000
C
What is the firm's break-even price?
Minimum average total cost
Profit-maximising level of output
Perfectly competitive firm maximizes profits by producing up to the point where the marginal revenue of the last unit produced is equal to its marginal cost, or MR = MC. A firm will not want to continue to produce once MC is greater than MR because that would reduce his profits.
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) produce a larger level of output B) produce a smaller level of output C) continue producing at the current output D) There is not enough information given to answer the question
b
Marginal revenue formula
change in total revenue / change in output
In the long run only the consumer benefits from
cost reductions
Short-run market equilibrium
is given by the intersection of the short-run industry supply curve and the demand curve
A market is in long-run market equilibrium
when the quantity supplied equals the quantity demanded, given that sufficient time has elapsed for entry into and exit from the industry to occur
If it produces, a perfectly competitive firm will maximize profits when the: A) Marginal revenue equals marginal cost B) Marginal revenue is lower than average variable cost C) Price is lower than marginal cost D) Price is higher than marginal cost
A
If the price is greater than the average variable cost and less than the average total cost at the profit-maximizing quantity of output in the short run, a perfectly competitive firm will: A) Continue to produce at an economic loss B) Earn an economic profit C) Encourage other firms to enter the industry D) Produce more than the profit-maximizing quantity
A
If, for a perfectly competitive firm, price exceeds the marginal cost of production, the firm should A) increase its output B) lower the price C) keep output constant and enjoy the above normal profit D) reduce its output
A
Perfectly competitive firm profit maximization
A firm maximizes their profit where the vertical distance between total revenue and total cost is the largest. This happens at an output of 6 bushels. This is one way of thinking about how a firm can determine the profit-maximizing quantity of wheat to produce.
For a perfectly competitive firm, the short-run supply curve is the: A) Entire MC curve B) Rising part of the MC curve beginning at the shut-down point C) Rising part of the MC curve beginning at the point at which the firm starts earning economic profit D) MC curve below the shut-down point
B
If firms are making positive economic profits in the short run, then in the long run: A) The short-run industry supply curve will shift leftward B) Firms will enter the industry C) Industry output will rise and the price will rise D) Firms will leave the industry.
B
Zoe's Bakery operates in a perfectly competitive industry. The variable costs at Zoe's Bakery increase, so all of the cost curves (with the exception of fixed cost) shift leftward. The demand for Zoe's pastries does not change, nor does the firm shut down. To maximize profits after the variable cost increase, Zoe's Bakery will ______ its price and _______ its level of production. A) Raise; increase B) Decrease; increase C) Raise; decrease D) Do nothing to; decrease
D
Marginal revenue
the change in total revenue from selling one more unit of a product. For a firm in a perfectly competitive market, price is equal to both average revenue and marginal revenue
If market price exceeds the break-even price
the firm is profitable, if it is less the firm is unprofitable
Short-run industry supply curve
is the industry supply curve given that the number of firms is fixed
Three conclusions about the cost of production and efficiency in the long-run equilibrium of a perfectly competitive industry
- in a perfectly competitive industry in equilibrium, the value of marginal cost is the same for all firms. - In a perfectly competitive industry with free entry and exit, each firm will have zero economic profits in long-run equilibrium. - The long-run market equilibrium of a perfectly competitive industry is efficient: no mutually beneficial transactions go unexploited.
A perfectly competitive firm has to charge the same price as every other firm in the market. Therefore, the firm A) is a price taker B) is not able to make a profit in the short run C) faces a perfectly inelastic demand curve D) faces a perfectly elastic supply curve
A
If the market price is £25 in a perfectly competitive market, the marginal revenue from selling the fifth unit is A) £25 B) £12.50 C) £125 D) £5
A
In perfect competition, the assumption of easy entry and exit implies that: A) In the long run all firms in the industry will earn zero economic profits B) In the short run all firms in the industry will earn positive economic profits C) In the short run all firms in the industry will earn zero economic profits D) In the long run all firms in the industry will earn positive economic profits
A
The lowest point on a perfectly competitive firm's short-run supply curve corresponds to the minimum point on the ______ curve. A) ATC B) AVC C) AFC D) MC
B
The shut-down price is: A) The price at which economic profit is zero B) The minimum of the AVC curve C) The intersection of the MC and ATC curves D) The minimum or the AFC curve
B
If a perfectly competitive firm raises the price it charges to consumers, which of the following is the most likely outcome? A) The firm's total revenue will increase only if the demand for its product is elastic B) The firm's revenue will not change because some consumers will refuse to pay the higher price C) The firm will not sell any output D) The firm's total revenue will increase only if the demand for its product is inelastic
C
If the price is consistently below the average variable cost, then in the short run a perfectly competitive firm should: A) Rise price B) Sell more output C) Shut down D) Lower price to sell more
C
In perfect competition A) the market demand curve and the individual firm's demand curve are identical B) the market demand curve is perfectly elastic while demand for an individual seller's product is perfectly inelastic C) the market demand curve is downward sloping while demand for an individual seller's product is perfectly elastic D) the market demand curve is perfectly inelastic while demand for an individual seller's product is perfectly elastic
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 will sell more output than its competitors C) The firm will not sell any output D) The firm's revenue will increase
C
In a graph that illustrates a perfectly competitive firm, marginal revenue 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
The price of a seller's product in perfect competition is determined by: A) the individual seller B) a few of the sellers C) the individual demander D) market demand and market supply
D
What is the demand curve for a perfectly competitive firm?
Firm faces a horizontal demand curve, it only sells at a market price
When is there free entry and exit?
When new producers can easily enter into or leave that industry
Fixed cost is irrelevant to the firm's optimal short-run production decision, which depends on its shut-down price—its minimum average variable cost—and the market price.
When the market price falls below the shut-down price, the firm ceases production in the short run. This generates the firm's short-run individual supply curve.
A perfectly competitive market
a market in which all market participants are price-takers
A perfectly competitive industry
an industry in which producers are price-takers
To maximize profit, a perfectly competitive firm A) should sell the quantity of output that results in a value for total revenue that is equal to total cost B) should produce the quantity of output that results in the greatest difference between total revenue and total cost C) should produce the quantity of output that results in the greatest difference between marginal revenue and marginal cost D) should sell the quantity of output determined by the interaction between industry demand and supply
b
Features of monopolistic competition
many firms, differentiated product, high ease of entry, market power eg clothing and restaurants
perfect competition
many firms, identical product, high ease off entry, no market power, eg wheat, apples
Long-run market equilibrium of a competitive industry
profit maximization leads each firm to produce at the same marginal cost, which is equal to market price. Free entry and exit means each firm earns 0 profit—producing the output corresponding to its minimum average total cost. So the total cost of production of an industry's output is minimized. The outcome is efficient because every consumer with a willingness to pay greater than or equal to marginal cost gets the good.
A firm will cease production in the short run if
the market price falls below the shut-down price (which is equal to minimum average variable cost)
The short-run industry supply curve shows how
the quantity supplied by an industry depends on the market price given a fixed number of producers.
A market is in long-run market equilibrium when...
the quantity supplied equals the quantity demanded, given that sufficient time has elapsed for entry into and exit from the industry to occur.
When is there a short-run market equilibrium
the quantity supplied equals the quantity demanded, taking the number of producers as given