Chapter 14

Question 1

What are the 3 characteristics of competitive markets?

Answer 1

1. There are many buyers and many sellers in the market
2. The goods offered by the various sellers are largely the same
   (So each buyer and seller have negligible impact on market price)
3. Firms can freely enter or exit the market and have no barriers to doing so

Question 2

Profit eqn

Answer 2

TR-TC

Question 3

Marginal revenue def

Answer 3

Change in total revenue from the sale of each additional unit of output (in competitive markets it equals the price of the good)

Question 4

Marginal revenue eqn

Answer 4

Change in total revenue / change in quantity

Question 5

Change in profit eqn

Answer 5

Marginal revenue MINUS marginal cost

Question 6

What is the eqn for PROFIT MAXIMIZING LEVEL OF OUTPUT?

Answer 6

MR = MC

Question 7

In a competitive market, what is the firms marginal cost curve equivalent to? (Another curve)

Answer 7

Supply curve

Question 8

Shutdown def

Answer 8

A short run decision not to produce anything during a specific period of time because of current market conditions

Question 9

Exit def

Answer 9

Long run decision to leave the market

Question 10

Sunk cost def (ex. Of farmer deciding not to produce any crop one season. What is sunk cost and how can he avoid it)

Answer 10

A cost that ash already been committed and cannot be recovered.
Sunk cost is the fixed cost of the land, he is paying it anyways even though he is not doing variable costs. He can avoid this sunk cost by selling the land and leaving farming all together (exit)

Question 11

Under what conditions does a firm shut down? Eqn, variables, inequalities pls

Answer 11

Total revenue < variable costs
Price < average variable cost

“Firm shuts down if revenue that it would earn from producing is less than its variable costs of production”

Question 12

In the long run, when will a firm exit the market? In terms f MC, P, and ATC

Answer 12

Produces on the MC curve (supply) if P>ATC
Exits if P<ATC

Question 13

Assuming firms and exit and enter as they please, everyone has access to same tech and markets to buy inputs….. what will happen if firms in the market are profitable/losses

Answer 13

Profitable
1. New firms incentivized to enter market so more firms
2. More quantity of goods supplied
3. Less profits

Making losses
1. Existing firms will exit the market so less firms
2. Less quantity of good supplied
3. More profits

Question 14

Profit eqn in terms of P, Q, ATC

Answer 14

(P-ATC) x Q

Question 15

When is there 0 profiti n terms of P and ATC? Is this efficient?

Answer 15

When P = ATC… which is most efficient

Question 16

What are 2 reasons that a long run supply curve might slope upwards?

Answer 16

1. Resources used in production may be available only in limited quantities (ex. Farm products, quantity of land is limited… if more people are farmers, price of farmland goes up…. More cos of all farmers in the market so more demand for farm products so more $ farmer and $ higher price)
2. Firms may have different costs (ex. In the market for painters)