Unit 7

Question 1

what are the four characteristics of a perfectly competitive market?

Answer 1

many buyers and sellers, identical products, free entry and exit, perfect information

Question 1

if marginal revenue is greater than marginal cost, the firm should do what?

Answer 1

increase its output

Question 2

if marginal cost is greater than marginal revenue, the firm should do what?

Answer 2

decrease its output

Question 3

when are marginal revenue, and marginal cost exactly equal?

Answer 3

at the profit maximizing level of output

Question 4

A competitive firm maximizes profit by choosing the quantity at which

Answer 4

marginal cost equals the price

Question 5

a competative firms short run supply curve is what?

Answer 5

its marginal cost curve, above its average-variable cost curve

Question 6

If a profit-maximizing, competitive firm is producing a quantity at which marginal cost is between average variable cost and average total cost, it will

Answer 6

keep producing in the short run but exit the market in the long run

Question 7

if a competative firm is a price taker, what does that mean for its revenue?

Answer 7

its revenue is proportional to the amount of output it produces. The price of the good equals both the firm’s average revenue and its marginal revenue.

Question 8

how does a firm maximize profit?

Answer 8

a firm chooses a quantity of output such that marginal revenue equals marginal cost

Question 9

when does a firm decide to temporarily shut down?

Answer 9

when it cannot recover its fixed costs, if the price of the good is less than AVC

Question 10

when does a firm choose to exit?

Answer 10

it will choose to exit if the price is less than average total cost

Question 11

in a market with free entry and free exit, profits are driven to what in the long run?

Answer 11

zero. In this long-run equilibrium, all firms produce at the efficient scale, price equals the minimum of average total cost, and the number of firms adjusts to satisfy the quantity demanded at this price.

Question 12

what is the profit maximizing rule?

Answer 12

firms maximize profit when marginal revenue equals marginal cost

Question 13

where should you always produce?

Answer 13

where MR meets MC

Question 14

which of the following is necessarily true when a competative firm maximizes profit where the price is greater than average total cost?

Answer 14

firms will enter the market if there are low barriers to entry

Question 15

the difference between total revenue and total cost gives you what?

Answer 15

profit

Question 16

if the ATC is above the MR line, what are you making?

Answer 16

a loss

Question 17

In the short run, what is the level of output a profit-maximizing price taker should choose?

Answer 17

P = MC, but only if P ≥ AVC

Question 18

Which one of the following is not a condition for a firm’s long-run decision to exit the market?

Answer 18

P < TC

Question 19

A firm will shut down in the short run if the total revenue that it would get from producing and selling its output is less than its _________ costs.

Answer 19

variable

Question 20

In the long run, when will a profit-maximizing firm choose to exit a market?

Answer 20

when total revenue is less than total cost

Question 21

The demand for the product of a competitive price-taker firm is

Answer 21

perfectly elastic.

Question 22

If marginal cost for a firm exceeds marginal revenue, what can be said about the firm?

Answer 22

It may still be earning a profit.

Question 23

When profit-maximizing firms in a competitive market are earning profits, what must be happening in the market?

Answer 23

New firms are entering the market

Question 24

By comparing marginal revenue and marginal cost, a firm in a competitive market is able to adjust production to the level that achieves its objective. What do we assume the objective to be?

Answer 24

maximization of profit

Question 25

A competitive market has a horizontal long-run supply curve and is in long-run equilibrium. If demand decreases, what can we be certain will happen in the short run?

Answer 25

Price will fall below average total cost.

Question 26

What curve represents a competitive firm’s supply curve?

Answer 26

the marginal-cost curve, above average variable cost

Question 27

When firms in a perfectly competitive market face the same costs, how must they be operating in the long run?

Answer 27

at their efficient scale

Question 28

When a new firm enters a market, what happens?

Answer 28

it will increase the supply of the good

Question 29

Consider a competitive market with a large number of identical firms. What happens to the price if the demand increases in this market?

Answer 29

Price will increase in the short run then fall back to its original level in the long run.

Question 30

In the long-run equilibrium of a competitive market, the number of firms in the market adjusts so that all of the market demand is satisfied. At what price would this happen?

Answer 30

at the minimum value of average total cost

Question 31

The competitive firm’s long-run supply curve is that portion of the marginal-cost curve that lies above which average cost?

Answer 31

total cost

Question 32

When price is greater than marginal cost for a firm in a competitive market, what should the firm do to maximize profit?

Answer 32

The firm should take advantage of opportunities to increase profit by increasing production.

Question 33

When entry and exit behaviour of firms in an industry do not affect a firm’s cost structure, what is the shape of the long-run market supply curve?

Answer 33

It must be horizontal

Question 34

A firm’s short-run supply curve is part of what?

Answer 34

marginal cost

Question 35

When a competitive market experiences an increase in demand that induces an increase in producer costs, which consequence is most likely?

Answer 35

The long-run market supply curve will be upward sloping.

Question 36

When fixed costs are ignored because they are irrelevant to a business’s production decision, what are they called?

Question 37

when will a firm shut down in the short run?

Answer 37

if the price is below the minimum of the firms average variable cost

Question 38

when will a firm shut down in the long run?

Answer 38

when the price is below the minimum of the firms average total cost