Chapter 11 FINAL

Question 1

competitive market operates under the following conditions

Answer 1

1. there are many buyers and sellers
2. the goods produced are essentially the same
3. there are little or no barriers to entry and exit

Question 2

the conditions of the competitive market imply that

Answer 2

no single buyer or seller has any influence on the market price and that all firms must sell their output at the same market price

Question 3

the goal of all firms is to

Answer 3

maximize profit

Question 4

profit is calculated as

Answer 4

the difference between total revenue and total cost

Question 5

profit=

Answer 5

total revenue-total cost=tr-tc

Question 6

total cost has two components

Answer 6

fixed costs: costs that do not vary with output

variable costs: costs that do vary with output

Question 7

since a firm in a competitve market must sell its output at the market price profit maximization depends

Answer 7

only on the firms output decision

Question 8

to maximize profit the firm must

Answer 8

think at the margin in its output decision

Question 9

marginal revenue

Answer 9

the change in total revenue from selling an additional unit of output

Question 10

marginal cost

Answer 10

the change in total cost from producing an additional unit of output

Question 11

to maximize profit a competitive firm will

Answer 11

expand production until the revenue from an additional sale = the cost of an additional sale

Question 12

if marginal revenue is greater than marginal cost (MR>MC)

Answer 12

an addition unity of output increases revenues more than costs leading to a greater profit

Question 13

if marginal revenue is less than marginal cost (MR

Answer 13

an additional unit of output increases costs more than revenues leading to less profit

Question 14

profit is maximized at a level of output where

Answer 14

MR=MC

Question 15

marginal revenue =

Answer 15

delta TR/Delta q

Question 16

marginal cost =

Answer 16

delta tc/ delta q

Question 17

since firms in competitive markets must sell their goods at the market price each sale increases total revenue by the

Answer 17

market price (MR=P)

Question 18

profit maximizing quantity in a competition occurs where

Answer 18

P=MC

Question 19

if the price of the good rises the firm will

as long as the firm remains in the industry

Answer 19

expand production along its MC curve

the firms MC curve is its supply curve

Question 20

shut down

Answer 20

a short-run decision not to produce anything during a specific period of time bc of current market conditions

Question 21

exit

Answer 21

a long-run decision to leave the market

Question 22

there are no _____ in the long run

Answer 22

fixed costs

all inputs are variable

Question 23

average cost

Answer 23

per unit cost of production

Question 24

average cost =

Answer 24

total cost/quantity

(fixed cost+variable cost)/ quantity

Question 25

average cost is influence by fixed & variable costs so the avg cost curve will be ___shaped

Answer 25

U

Question 26

at first, average cost decreases as

Answer 26

fixed costs of production are spread over greater quantities as a quantity approaches the capacity of the firms production facility, variable costs increase causing avg cost to rise

Question 27

if marginal value is greater than the average

Answer 27

total cost is increasing faster than the quantity so the average must go up

Question 28

if a marginal value is less than the average

Answer 28

the cost is increasing slower than the quantity so the average must go down

Question 29

MC>AC the average goes

Answer 29

up

Question 30

MC

Answer 30

down

Question 31

profit =

Answer 31

(p-avg cost)xq

Question 32

profit is positive whenever

Answer 32

P>AC since P=MC also whenevr MC>AC or when the MC curve is above the AC curve

Question 33

profit is negative whenever

Answer 33

P

Question 34

profit is 0 when

Answer 34

MC=AC of where the MC curve intersects the AC curve

Question 35

in competitive markets a firm will be profitable when | and unprofitable when

Answer 35

P>AC firms will enter | P

Question 36

when P=AC there is no

Answer 36

entry or exit

Question 37

a firm may not immediatly shut down when the price falls below average cost because

Answer 37

shutdown does not immediately eliminate all costs even when it ceases to produce any output it will incur some fixed costs in the short run (rent, mortgage interest, taxes, unsurance)

Question 38

produce (in the short run) only when

Answer 38

revenues cover variable costs-it minimizes losses

Question 39

the industry supply curve is built from

Answer 39

the MC curves and the entry and exit decision of firms

Question 40

constant cost industry

Answer 40

industry where costs of production remain unchanged as output expands or contracts

Question 41

constant cost industries capture two important aspects of competitive markets:

Answer 41

1. price is quickly driven down to avg cost of production 2. firms earn zero (or normal) profit (does not mean that firms are just breaking even in an accounting sense, firms are earning a rate of profit equal to that of any other use of those inputs)

Question 42

increasing cost industry

Answer 42

industry characterized by greater costs as production expands

Question 43

decreasing cost industry

Answer 43

lower costs as production expands