Chapter 8 Perfect Competition

Chapter 8 Perfect Competition Key Concepts Summary Practice Quiz Internet Exercises©2000 South-Western College Publishing1In this chapter, you will learn to solve these economic puzzles:Why is the demand curve horizontal for a firm in a perfectly competitive market?Why would a firm stay in business while losing money?In the long-run, can alligator farms earn an economic profit?2Who was Adam Smith?The father of modern economics who wrote The Wealth of Nations, published in 17763What did Adam Smith say about Competitive Forces?They are like an “invisible hand” that leads people who simply pursue their own interests to serve the interests of society4What is the purpose of this chapter?To explain how competitive markets determine prices, output, and profits5What isMarket Structure?A classification system for the key traits of a market, including the number of firms, the similarity of the products they sell, and the ease of entry and exit6What isPerfect Competition?1. many small firms2. homogeneous product3. very easy entry and exit4. price taker7What doesHomogeneous mean?Goods that cannot be distinguished from one another; for example, one potato cannot be distinguished from another potato8What is a Price Taker?A seller that has no control over the price of the product it sells9What determines price?Supply and demand10$80$60$40$205101520$100$120$130$1402530354045DSMarket Supply and DemandPQ11What determines the individual firm’s Demand Curve?A horizontal line at the market price12$80$60$40$205101520$100$120$130$1402530354045DIndividual firm demand13Why is this horizontal line the firm’s Demand Curve?If the firm charges more than this price, it will not sell anything, and it has no incentive to charge less than this price14Why does the firm have no incentive to charge less than the market price?It can sell everything it brings to market at the market price15What does the Perfectly Competitive Firm control?The only thing it controls is how many units it produces16How many units should this firm produce?The number of units whereby it will maximize its profits, or at least minimize its losses17What are the two methods to determine how many units to produce?TR and TCMR and MC 18Using the Total Revenue - Total Cost method, where should a firm produce?Where the distance between TR and TC is the greatest19$400$100124$300$2005$5003Quantity of OutputTRMaximize ProfitTCPQ20$100-$50124$5005$1503Quantity of OutputTRMaximize Profit OutputPQ21What isMarginal Revenue?MR = TR / 1 output22What isMarginal Cost?MC = TC / 1 output23Using the Marginal Revenue and Marginal Cost method, where should a firm produce?MR = MC24Why should a firm continue to produce as long as MR > MC?As long as MR is > than MC, money is being made on that last unit25Why will a firm not produce that unit where MR than MC, an additional unit would be produced. If MR were < MC, that last unit would not be produced.796. A perfectly competitive firm sells its output for $100 per unit, and the minimum average variable cost is $150 per unit. The firm shoulda. increase output.b. decrease output, but not shut down.c. maintain its current rate of output.d. shut down.D. At this output a firm’s losses exceed its fixed costs; it would therefore lose more money by staying open than by closing down. 80$40$30$20$101234$50$60$70$8056789ATCAVCMCP=MR=ARShort-Run ShutdownPrice & Cost per unitMR=MC817. A perfectly competitive firm’s supply curve follows the upward sloping segment of its marginal cost curve above the a. average total cost curve.b. average variable cost curve.c. average fixed cost curve.d. average price curve.B. The supply curve does not extend below the AVC curve because below this price the firm would close down; there would not be a supply curve. 82$10$55001,000$15$201,5002,000ATCAVCMCPrice & Cost per unitBCDAExhibit 15QP838. Assume the price of the firm’s product in Exhibit 15 is $15 per unit. The firm will produce a. 500 units per week.b. 1,000 units per week.c. 1,500 units per week.d. 2,000 units per week.e. 2,500 units per week.D. This is the number of units in which MR = MC.849. The lowest price in Exhibit 15 at which the firm earns zero economic profit in the short-run is a. $5 per unit.b. $10 per unit.c. $20 per unit.d. $30 per unit.B. This is the minimum point of the ATC curve at which P = ATC. Exactly a normal profit is being made, that is, zero economic profit.8510. Assume the price of the firm’s product in Exhibit 15 is $6 per unit. The firm should a. continue to operate because it is earning an economic profit.b. stay in operation for the time being even though it is earning an economic loss.c. shut down temporarily.d. shut down permanently.B. At this price, the firm’s losses are less than its fixed costs; it will therefore lose less money by staying open than closing.8611. Assume the price of the firm’s product in Exhibit 15 is $10 per unit. The maximum profit the firm earns is a. zero.b. $5,000 per week.c. $1,500 per week.d. $10,500 per week.A. In perfect competition, Price = AR = MR = the firm’s short-run demand curve. When P = ATC, the firm’s revenues equal its costs, so zero economic profits are made. Normal profit is included as a part of the firm’s cost data because it is a necessary expense of operating the business. 8712. In Exhibit 15, the firm’s total revenue at a price of $10 per unit pays for a. a portion of total variable costs.b. a portion of total fixed costs.c. none of the total fixed costs.d. all of the total fixed costs and total variable cost.D. At a price of $10, the firm is making an economic profit - more than enough money is being made to meet its fixed costs. 8813. As shown in Exhibit 15, the short-run supply curve for this firm corresponds to which segment of its marginal cost curve? a. A to D and all points above.b. B to D and all points above.c. C to D and all points above.d. B to C only.B. A supply curve shows how many units will be produced at various prices. The firm’s supply curve is its MC curve which lies above its AVC curve because it will always produce where MR (AR, P) = MC. 8914. In long-run equilibrium, the perfectly competitive firm’s price equals which of the following? a. Short-run marginal cost.b. Minimum short-run average total cost.c. Marginal revenue.d. All of the above.D. Long-run equilibrium is at the price in which a normal profit is being made. Normal profit is when P(AR) = ATC in long-run equilibrium.9015. In a constant-cost industry, input prices remain constant as? a. the supply of inputs fluctuates.b. firms encounter diseconomies of scale.c. workers become more experienced.d. firms enter and exit the industry.D. A constant-cost industry is when the entry or exit of firms has little impact on a firm’s cost curves. 9116. Suppose that , in the long run, the price of feature films rises as the movie production industry expands. We can conclude that movie production is a (an) a. increasing-cost industry.b. constant-cost industry.c. decreasing-cost industry.d. marginal-cost industry.A. An industry in which the expansion of industry output by the entry of new firms increases the firm’s cost curves9217. Which of the following is true of a perfectly competitive market? a. If economic profits are earned, then the price will fall over time.b. In long-run equilibrium, P = MR = SRMC = SRATC = LRAC.c. A constant-cost industry exists when the entry of new firms has no effect on their cost curves.d. All of the above.D. All of the above statements are true. 93Internet ExercisesClick on the picture of the book, choose updates by chapter for the latest internet exercises94END95