Chapter 9

Question 1

Market structure

Answer 1

The characteristics of a market that influence how trading takes place.

Question 2

four requirements of perfect competition

Answer 2

a. Large numbers of buyers and sellers
i. No individual decision maker can significantly affect the price of the product by changing the quantity it buys or sells
b. Sellers offer a standardized product
i. Buyers do not perceive differences between the products of one seller and another
c. Sellers can easily enter into or exit from the market
i. No significant barriers or special costs to discourage new entrants
ii. No barriers to exit
d. Buyers and sellers are well-informed
i. Buyers and sellers have all information relevant to their decision to buy or sell

Question 3

Price Taker

Answer 3

– a firm that treats the price of its product as given and beyond its control

Question 4

Profit maximizing output

Answer 4

Profit-maximizing output

a. Where the MC curve crosses the MR curve from below

Question 5

6. Use graphs to show a firm’s level of profit or loss.

Answer 5

The difference between total costs MINUS total revenue. 
•	Firm earns profit: P > ATC
•	Firm suffers a loss: P < ATC
Total profit (or loss)
•	At the best output level
•	Area of a rectangle
•	Height = distance between P and ATC
•	Width = quantity of output

Question 6

Minimum efficient scale

Answer 6

The lowest output level at which the firms LRATC curve hits the bottom

Question 7

short-run market supply curve

Answer 7

Short run equilibrium

a. Economic profit
i. If P > ATC
b. Economic loss
i. If AVC < P < ATC

Question 8

profit and loss drive changes in markets over the long run.

Answer 8

Long-run: attract new entrants
i. Market supply curve shifts rightward
1. Market price falls
2. Horizontal demand curve facing each firm shifts downward
3. Each firm will slide down its marginal cost curve, decreasing output
ii. Until each firm is earning zero economic profit
Economic profit (normal profit)
– Just enough accounting profit to cover implicit costs
– Not the same as zero accounting profit
MC = minimum ATC = minimum LRATC = P

Question 9

constant cost, increasing cost, or decreasing cost industry.

Answer 9

Constant cost - An industry in which the long run supply curve is horizontal because each firms cost curves are unaffected by changes in industry output.
Increasing cost – the supply curve slopes upward because each firms LRATC curve shifts upward as industry output increases.
Decreasing cost – Supply curve slopes downward because each firms LRATC curve shifts downward as industry output increases.

Question 10

Technological advance

Answer 10

Technological advance

a. Rightward shift of the market supply curve
b. Decreasing market price
c. In the short run
i. Early adopters may enjoy economic profit
d. In the long run
i. All adopters will earn zero economic profit
e. Firms that refuse to use the new technology will not survive