Chapter 14 - Firms in Competitive Markets

Question 1

Competitive Market

Answer 1

Perfectly competitive market

1. there are many buyers and sellers in the market
2. The goods that are offered are largely the same
3. firms can freely enter or exit the market

Question 2

Firm’s Total Revenue

Answer 2

Market Price x Quantity

Question 3

Average Revenue

Answer 3

Total Revenue divided by quantity of outputs

For all types of firms, average revenue equals the price of the good

Question 4

Marginal Revenue

Answer 4

Change in total revenue with an additional output sold. This will always just be the price of the additional good, because in competitive market you do not change the price just because you’re selling an extra unit

Question 5

Maximizing Profit

Answer 5

As long as the marginal revenue exceeds the marginal cost, the quantity produced raises profit

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-maximizing level of output, marginal revenue equals marginal cost.

Question 6

Shutdown

Answer 6

When a firms shuts down, it is a temporary, short-run decision to stop producing for a period of time at a specific time.

When a firm shuts down they still need to be able to pay their fixed costs during this time until they open again

Question 7

Exit

Answer 7

When a firm decides to exit the market it is a long-run decision to leave

Once they exit they don’t pay fixed or variable costs anymore

Question 8

Sunk Cost

Answer 8

A cost that has been committed and cannot be recovered

Money that is essentially wasted

Doesn’t determine future decisions

Question 9

Decision to Shut down

Answer 9

If the revenue that a firm is making is less than its variable cost then it shuts down

Total Revenue < Variable Cost

Price of good < Average Variable Cost

Question 10

Short Run Supply Curve

Answer 10

The portion of its marginal cost curve that is above the average variable cost curve

Question 11

Profit

Answer 11

Profit = (Price - Average Total Cost) x Quantity

Question 12

Firm With losses

Answer 12

Area of rectangle above price, under average total cost

Question 13

Firm with Profit

Answer 13

Area of rectangle under the price but above the dip of the average total cost

Question 14

Profit Maximizing rules for a completive firm

Answer 14

1. Find Q at which P 5 MC.
2. if P < AVC, shut down immediately and remain out of business.
3. if AVC < P < ATC, operate in the short run but exit in the long run.
4. if ATC < P, stay in business and enjoy your profits!