Chapter 12- Firms in Perfectly Competitive Markets

Question 1

Perfect competition is a market structure involving a(n) _____ number of buyers and seller, a(n) _____ product, and _____ market entry and exit.

Answer 1

large; homogenous (standardized); easy

Question 2

Perfectly competitive firms are _____, who must accept the market price as determined by the forces of demand and supply.

Answer 2

price takers

Question 3

Because perfectly competitive markets have _____ buyers and sellers, each firm is so _____ in relation to the industry that its production decisions have no impact on the market.

Answer 3

many; small

Question 4

Because consumers believe that all firms in a perfectly competitive market sell _____ products, the products of all the firms are perfect substitutes.

Answer 4

identical (homogenous)

Question 5

Because of _____ market entry and exit, perfectly competitive markets generally consists of a(n) _____ number of small suppliers.

Answer 5

easy; large

Question 6

In a perfectly competitive industry, each producer provides such a(n) _____ fraction of the total supply that a change in the amount he or she offers does not have a noticeable effect on the market price.

Answer 6

small

Question 7

Because perfectly competitive sellers can sell all they want at the market price, their demand curve is _____ at the market price over the _____ range of output that they could possibly produce.

Answer 7

horizontal; entire

Question 8

The objective of a firm is to maximize profits by producing the amount that maximizes the difference between its _____ and _____.

Answer 8

total revenues; total costs

Question 9

Total revenue for a perfectly competitive firm equals the _____ times the _____.

Answer 9

market price; quantity of units sold

Question 10

_____ equals the total revenue divided by the number of units of the product sold.

Answer 10

average revenue

Question 11

_____ is the additional revenue derived from the sale of one more unit of the good.

Answer 11

marginal revenue

Question 12

In perfect competition, we know that _____ and price are equal.

Answer 12

marginal revenue

Question 13

In all type of market environments, firms will maximize profits at that output which maximizes the difference between _____ and _____, which is the same output level where _____ equals _____.

Answer 13

total revenue; total costs; marginal revenue; marginal costs

Question 14

At the level of output chosen by a competitive firm, total cost equals _____ times quantity, while total revenue equals _____ times quantity.

Answer 14

average total cost; the market price

Question 15

If total revenue is greater than total costs at its profit-maximizing output level, a firm is generating _____. If total revenue it less than total costs, the firm is generating _____. If total revenue equals total costs, the firm is earning _____.

Answer 15

economic profits; economic losses; zero economic profits

Question 16

If a firm cannot generate enough revenues to cover its _____ costs, then it will have larger losses if it operates than if it shuts down in the short run.

Answer 16

variable

Question 17

The loss a firm would bear if it shuts down would be equal to _____.

Answer 17

fixed costs

Question 18

When price is less than _____ but more than _____, a firm produces in the short run, but at a loss.

Answer 18

average total costs; average variable costs

Question 19

The short-run supply curve of an individual competitive seller is identical with that portion of the _____ curve that lies above the minimum of the _____ curve.

Answer 19

marginal cost; average variable cost

Question 20

The short-run market supply curve is the horizontal summation of the individual firms’ supply curves, providing that _____are not affected by increased production by existing firms.

Answer 20

input prices

Question 21

If perfectly competitive producers are currently making economic profits, the market supply curve will shift to the right over time as more firms _____ and existing firms _____.

Answer 21

enter the industry; expand

Question 22

As entry into a profitable industry pushes down the market price, producers will move from a situation where price _____ average total cost to one where price _____ average total cost.

Answer 22

exceeds; equals

Question 23

Only at _____ is the tendency for firms either to enter or leave the business eliminated.

Answer 23

zero economic profits

Question 24

The long-run equilibrium output in perfect competition occurs at the lowest point on the average total cost curve, so the equilibrium condition in the long run in perfect competition is for firms to produce at the output that minimizes the _____.

Answer 24

average total cost curve

Question 25

The shape of the long-run supply curve depends on the extent to which _____ change with the entry or exit of firms in the industry.

Answer 25

input costs

Question 26

In a constant-cost industry, the prices of inputs _____ as output is expanded.

Answer 26

do not change

Question 27

In an increasing-cost industry, the cost curves of the individual firms _____ as the total output of the industry increases.

Answer 27

rise

Question 28

There is a _____ efficiency in perfect competition because the firm produces at the minimum of the ATC curve.

Answer 28

productive

Question 29

There is _____ efficiency in perfect competition because P=MC and production is allocated to reflect consumers’ wants.

Answer 29

allocative

Question 30

Once the competitive equilibrium is reached, the buyers’ _____ equals the sellers’ _____.

Answer 30

marginal benefit; marginal cost

Question 31

A perfectly competitive firm that takes the prices it is given bu the intersection of the market demand and market supply curve.

Answer 31

price takers

Question 32

The product price times the quantity sold.

Answer 32

total revenue

Question 33

Total revenue divided by the number of units sold.

Answer 33

average revenue

Question 34

The increase in total revenue resulting from a one-unit increase in sales.

Answer 34

marginal revenue

Question 35

A firm should always produce at the output where MR = MC

Answer 35

profit-maximizing level of output

Question 36

The portion of the MC curve above the AVC curve.

Answer 36

short-run supple curve

Question 37

The horizontal summation of the individual firms’ supple curves in the market.

Answer 37

short-run market supple curve

Question 38

An industry where input prices (and cost curves) do not change as industry output changes.

Answer 38

constant-cost industry

Question 39

An industry where input prices rise (and cost curves rise) as industry output rises.

Answer 39

increasing cost-industry

Question 40

Where a good or service is produced at the lowest possible cost.

Answer 40

productive efficiency

Question 41

Where P = MC and production will be allocated to reflect consumer preferences.

Answer 41

allocative efficiency