Firms in Competitive Markets

Question 1

What is a perfectly competitive market?

Answer 1

A market with many buyers/sellers trading identical products so that EACH buyer and seller are price takers.

Question 2

Are there barriers for firms to enter in a perfectly competitive market?

Answer 2

No

Question 3

When should a firm shut down?

Answer 3

Total Revenue < Variable cost

Question 4

In a perfectly competitve market

Answer 4

Price = Average Revenue = Marginal revenue

Question 5

To maximize profit, perfectly competitve firms find the level of output such that

Answer 5

Marginal Cost = Marginal Revenue

Question 6

In the long run equilibrium, the marginal firm has

Answer 6

Price equal to Average Total Cost

Question 7

How low can the price go until the firm decided to shutdown?

Answer 7

At the minimum Average Variable Cost

Question 8

If Price is less than Average Total Cost, then

Answer 8

All economic profits are positive

Question 9

In the long run, firms in a competitive market will have

Answer 9

zero economic profit

Question 10

If demand increases, price will

Answer 10

Rise in the short run. Some firms will enter the industry

Question 11

If demand decreases, price will

Answer 11

Price will then fall to reach the new long-run equilibrium