Chapter 9 - Competitive Markets

Question 1

What is market structure?

Answer 1

Features that affect behaviour and performance of firms in that market

Question 2

What is market power?

Answer 2

When firms can determine its own price

Question 3

A market is said to be _ when its firms have little or no market power

Answer 3

Competitive

Question 4

The more market power the firms have, the (more/less) competitive the market is

Answer 4

Less

Question 5

What occurs when each firm has zero market power?

Answer 5

A perfectly competitive market

PC when MP = 0

Question 6

When degree of competition increases, market power (inc/dec)

Answer 6

Decreases

Question 7

What is competitive behaviour?

Answer 7

The degree to which individual firms vie with one another

Question 8

MasterCard and Visa engage in _ _ but their market is _ _

Answer 8

Competitive behaviour, not competitive

Question 9

GM and Toyota engage in _ _ but their market is _ _

Answer 9

Competitive behaviour, not competitive

Question 10

Two wheat farmers don’t engage in _ _ but they both exist is a _ _ _

Answer 10

Competitive behaviour, very competitive market

Question 11

What are the 4 assumptions of perfect competition?

Answer 11

1. All sell a homogenous (similar) product
2. Customers know nature and price of product
3. Each reaches min LRAC at an output that’s small relative to the industry’s total output
4. Industry characterized by freedom of entry and exit

Question 12

In a perfectly competitive market, the DC for each firm is _

Answer 12

Horizontal

Question 13

In a perfectly competitive market, the DC for the industry is _ _

Answer 13

Downward sloping

Question 14

What does a horizontal DC mean for each firm?

Answer 14

The price will always be the same no matter then change in Q

Question 15

Give the equation for total revenue (TR)

Answer 15

TR = p x Q

Question 16

Give the equation for avg revenue (AR)

Answer 16

AR = (p x Q)/Q = p
AR = TR/Q = p

Question 17

Give the equation for marginal revenue (MR)

Answer 17

MR = dTR/dQ = p

Question 18

Give the equation for profits

Answer 18

TR-TC

Question 19

Give the equation for total costs (TC)

Answer 19

TC = TVC+TFC

Question 20

If TR

Answer 20

Economic loss

Question 21

What happens when a firm produces nothing?

Answer 21

Operating loss = fixed costs

Question 22

What happens when a firm decides to produce?

Answer 22

Fixed + variable costs

Question 23

If revenue is less than its variable cost, the firm will (gain/lose) more by producing than by not producing at all

Answer 23

Lose

Question 24

What are the 2 cases where a firm will not produce?

Answer 24

TR < TVC

AR < AVC

Question 25

What is the shut-down price?

Answer 25

Equal to the minimum of a firm's AVC

Question 26

If MR>MC, _

Answer 26

Produce more q

Question 27

If MR=MC, _

Answer 27

No incentive to change q

Question 28

If MR

Answer 28

Produce less q

Question 29

Profit is maximized when _ = _

Answer 29

MR = MC

Question 30

For a competitive firm, choose output where _ = _

Answer 30

p = MC

Question 31

When P > AVC, what occurs (2)?

Answer 31

Firms don't close | MC = MR (if perfect competition, MC = P)

Question 32

What is the SC of a competitive firm equal to?

Answer 32

MC curve above the AVC curve

Question 33

What is the SC of a competitive industry?

Answer 33

Horizontal sum of the MC curves (above AVC)

Question 34

When P=ATC, _

Answer 34

Profit = 0

Question 35

When P>ATC, _

Answer 35

Profit > 0

Question 36

When P

Answer 36

Profit < 0

Question 37

Entry leads to an (inc/dec) in supply and (inc/dec) in price

Answer 37

Increase, decrease

Question 38

Exit leads to an (inc/dec) in supply and (inc/dec) in price

Answer 38

Decrease, increase

Question 39

What are the 3 conditions for LR equilibrium?

Answer 39

1. Maximizing profits 2. 0 economic profits 3. Existing firms are at min LRAC

Question 40

Old plants are discarded when P _ AVC

Answer 40

< (less than)

Question 41

What happens when a competitive industry in LR equilibrium experiences a continual decrease in demand? (Firms)

Answer 41

Continue operating as long as production costs can be covered

Question 42

What happens when a competitive industry in LR equilibrium experiences a continual decrease in demand? (Govt)

Answer 42

Support declining industries to prevent job losses