Week 9 - Firms in Competitive Markets

Question 1

What are the 3 main characteristics of a perfectly competitive market?

Answer 1

1. The market has MANY buyers and MANY sellers.
2. The goods offered by the various sellers are largely the SAME.
3. Firms can FREELY ENTER or EXIT the market.

Question 2

Define the term ‘Price takers’?

Answer 2

a buyer or seller who takes the price given by market conditions.

Question 3

Fill in the following one-word gap: For competitive firms, marginal revenue ______ the price of the good

Answer 3

equals

Question 4

What are the 3 key rules that should be followed for profit-maximisation?

Answer 4

1. If marginal revenue is greater than marginal cost, the firm should INCREASE its output.
2. If marginal cost is greater than marginal revenue, the firm should DECREASE its output.
3. At the profit-maximising level of output, marginal revenue EQUALS marginal cost. (MR = MC)

Question 5

Define the term ‘Shutdown’ in terms of microeconomics?

Answer 5

Refers to a short-run decision not to produce anything during a specific period because of current market conditions.

Question 6

Define the term ‘Exit’ in terms of microeconomics?

Answer 6

refers to a long-run decision by a firm to leave the market.

Question 7

Fill in the following gaps: As a shutdown is for the _____ run, the fix costs ______ be avoided.

Answer 7

short, cannot

Question 8

Fill in the following gaps: As an Exit is for the _____ run, the fix costs ______ be avoided.

Answer 8

long, can

Question 9

Define the term ‘Sunk cost’?

Answer 9

a cost that has already been committed and cannot be recovered.

Question 10

Fill in the following gap with the appropriate equality sign: Shut down if Total Revenue ____ Variable Costs.

Answer 10

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Question 11

Fill in the following gap with the appropriate equality sign: Shut down if Total Revenue / Quantity ___ Variable Costs / Quantity.

Answer 11

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Question 12

Fill in the following gap with the appropriate equality sign: Shut down if Price ___ Average Variable Costs.

Answer 12

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Question 13

Fill in the following gap with the appropriate equality sign: Exit if Total Revenue ___ Total Cost.

Answer 13

<

Question 14

Fill in the following gap with the appropriate equality sign: Exit if Total Revenue / Quantity ___ Total Cost / Quantity.

Answer 14

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Question 15

Fill in the following gap with the appropriate equality sign: Exit if Price ___ Average Total Cost

Answer 15

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Question 16

Fill in the following gap with the appropriate equality sign: Enter if Price ____ Average Total Cost

Answer 16

>

Question 17

Name 3 formulas used to calculate the profit?

Answer 17

1. Profit = Total Revenue - Total Cost
2. Profit = (Total Revenue / Quantity - Total Cost / Quantity) X Quantity
3. Profit = (Price - Average Total Cost) X Quantity

Question 18

What is the formula used to calculate Total Revenue (TR)?

Answer 18

Total Revenue (TR) = p x q

Question 19

What is the formula used to calculate Average Revenue (AR)?

Answer 19

Average Revenue (AR) = TR/q = (p x q)/q = p

Question 20

What is the formula used to calculate Marginal Revenue (MR)?

Answer 20

Marginal Revenue (MR) = △TR/△q

Question 21

What is the formula used to calculate Average Total Cost (ATC)?

Answer 21

Average Total Cost (ATC) = Average Variable Cost (AVC) + Average Fixed Cost (AFC)