Microecon chapter 9

Question 1

Competitive market (perfect competition) arises when… (4)

Answer 1

• Many sellers of an identical product
• Customers know the makers of the produce sold
• No restriction of entry/ exit
• Each firm output is small relative to industry output

Question 2

Firms are…

Answer 2

Price takers

Question 3

Makers demand curve

Answer 3

Negative slope

Question 4

Firm demand curve

Answer 4

Horizontal line

Question 5

Average revenue fromula

Answer 5

AR = TR/Q = PQ/Q = P

Question 6

Firm precision in SR

Answer 6

• Produce or not
• If produce, how much?

Question 7

Firm precision in LR

Answer 7

• Increase/decrease in plant size
• Stay in or exit industry

Question 8

MR in competitive market

Answer 8

Additioned revenue from 1 market sale

Question 9

MC in competitive market

Answer 9

Additioned cost to make 1 market unit

Question 10

If MR > MC

Answer 10

Q↑ and π↑

Question 11

If MR < MC

Answer 11

Q↓ and π↑

Question 12

If MR = MC

Answer 12

NO Δ in Q to improve π (π is maximized)

Question 13

If P < ATC

Answer 13

π > 0

Question 14

If P > ATC

Answer 14

π < 0

Question 15

If P = ATC

Answer 15

π = 0

Question 16

MC in SR supply curve (3)

Answer 16

• Above minimum AVC
• No supply bellow minimum AVC
• P < AVC => no supply

Question 17

If P < P0

Answer 17

Shut down

Question 18

If P0 ≤ P < P1

Answer 18

Decision time

Question 19

If P0 > P1

Answer 19

Economic profit

Question 20

In LR, industry can adjust one or two wages

Answer 20

• # of f firms may change
• Firms may change the scale of the plant

Question 21

Signal to firms to entry/exit

Answer 21

Economic profit / loss

Question 22

If π > 0

Answer 22

Entry n and s ↑ (Shift right)

Question 23

If π < 0

Answer 23

Exit n and s ↓ (Shift left)

Question 24

If π = 0

Answer 24

No entry/exit (LR solution)

Question 25

Price in LR

Answer 25

At minimum ATC

Question 26

Conditions for LR (3)

Answer 26

• Firm max π and P = MR = MC
• No economic profit/loss (P = min. ATC)
• Firms cannot Δ plant size to increase profit (AT min. LRAC or MES)

Question 27

Change in technology (2)

Answer 27

• Increase in tech lowers price until P = ATC
• Entry for new firms

Question 28

Declining industries (2)

Answer 28

• Decrease in demand => successive decrease in price
• P < ATC => economic loss

Question 29

Firm response to declining industries (2)

Answer 29

• Continue to operate as long as P = AVC
• Use existing equipment until it wears out

Question 30

Government response to declining industries (3)

Answer 30

• Support industry to not lose jobs
• Do nothing, allow failure
• Retraining, temporary income support