week 6

Question 1

what are the assumptions about perfect competition

Answer 1

the market has many buyers and many sellers
firms produce identical outputs
no firm has the power to determine price of goods, firms are price takers
no barriers to entry or exit
perfect information and low transaction cost
perfect competition is the benchmark of efficiency

Question 2

how do you calculate profit maximisation

Answer 2

π = TR - TC

Question 3

how do you calculate total revenue

Answer 3

price x quantity sold

Question 4

how do you calculate average revenue

Answer 4

total revenue / quantity sold
= price

Question 5

what is marginal revenue

Answer 5

the additional revenue from selling one additional unit of output

Question 6

how do you calculate marginal revenue

Answer 6

MR = ∂TR / ∂q

Question 7

how is profit maximised in a perfectly competitive market

Answer 7

occurs when p = MC

Question 8

what are the conditions for firm shutdown

Answer 8

firm will shutdown if p < AVC
as long as p ≥ AVC the firm will operate

Question 9

what are the factors of long run competitive equilibrium

Answer 9

free entry
all other factors are variable
occurs when market price is equal to minimum average total cost
at equilibrium the firm earns zero economic profit

Question 10

what is free entry

Answer 10

the ability of a firm to enter an industry without encountering legal or technical barriers