Chapter 11

Question 1

Economic profit (pi) formula

Answer 1

TR-Total economic cost
TR- Explicit costs- Implicit costs

Question 2

Perfect competition

Answer 2

market structure where all firms are price takers, produce a homogenous product, and there are no barriers to entry

Question 3

Perfectly elastic demand

Answer 3

horizontal demand facing a single price-taking firm in a competitive market (E= infinity) (D= MR)

Question 4

Shut down

Answer 4

producing no output in the short run but still pays for fixed costs

Question 5

Profit margin

Answer 5

difference between price and ATC
Profit margin= P-ATC

Question 6

Average profit

Answer 6

total profit divided by quantity, measures the profit per unit and its equivalent to profit margin when all units sell for the same price
Pi/Q

Question 7

Can profit and profit margin both be maximized at the same time?

Answer 7

No, they cannot be maximized at the same time. Therefore, profit margin/ AP should be ignored when making profit- maximizing decisions

Question 8

Breakeven points

Answer 8

output levels where P=ATC and profit=0

Question 9

Shut down price

Answer 9

price below which a firm shuts down in the short run (minimum AVC)

Question 10

Where is the SR supply curve for an individual firm on a graph?

Answer 10

the portion of the MC curve above the minimum of the AVC curve

Question 11

What is the quantity supplied when prices are set lower than the minimum AVC?

Answer 11

0

Question 12

What is the formula for producer surplus and what shape is it on a graph?

Answer 12

PS= TR- TVC
Trapezoid, A= (b1+b2/2)h

Question 13

Long run competitive equilibrium

Answer 13

condition where all firms are producing where P= LMC and economic profits are zero (P=LAC)

Question 14

Are firms maximizing profit in LR competitive equilibrium? How does it occur?

Answer 14

Yes, and there is no incentive to enter/ leave the market because economic profits are zero
It occurs because of firms entering/ exiting the market, which adjusts so that P=LMC=LACmin

Question 15

Constant-cost industry

Answer 15

an industry in which input prices remain constant as all firms in the industry expand output

Question 16

Increasing-cost industry

Answer 16

industry in which input prices increase as all firms in the industry expand output

Question 17

For both constant-cost and increasing-cost industries, what do the curves look like? What do the LR supply curves show?

Answer 17

Constant-cost curve is flat, increasing-cost is upward sloping
They show the various levels of industry output that allow the industry to reach LR competitive equilibrium

Question 18

For both constant-cost and increasing-cost industries, what is economic profit equal to? What do both curves provide information of?

Answer 18

Economic profit=0
They provide us the minimum LAC and LMC for all firms

Question 19

Marginal revenue product (MRP)

Answer 19

additional revenue earned when firms hire one more unit of input
MRP=(change in TR/change in I)= MRMP= PMP

Question 20

When should another unit be hired according to MRP?

Answer 20

If MRP is greater than the price of the input
Employers should hire inputs at which MRP=input price

Question 21

Average revenue product (ARP)

Answer 21

average revenue per worker
ARP= TR/L= PQ/L= PAP

Question 22

Implementation of general rules: Should the firm produce or shut down?

Answer 22

Produce when market price is greater than or equal to AVCmin, otherwise shut down

Question 23

Implementation of general rules: How much should a firm produce?

Answer 23

Produce where P=SMC