Chapter 14 - Perfect Competition

Question 1

Characteristics of Perfect Competition

Answer 1

• many buyers and sellers
• the goods offered for sale are largely the same
• Firms can freely enter or exit the market
• each buyer is a price-taker

Question 2

Total Revenue (TR)

Answer 2

= P x Q

Question 3

Average Revenue (AR)

Answer 3

= TR / Q
= P x Q / Q
= P

Question 4

Marginal Revenue (MR)

Answer 4

• The change in TR from selling one more unit

= change in TR / change in quantity

• MR = P is only true for a firm in a competitive market

Question 5

Profit Maximization

Answer 5

• if MR > MC - increase in Q increases profit

- if MR

Question 6

Shutdown decision

Answer 6

• a firm’s short-run decision not to produce anything because of market conditions
• must still pay FCs

Question 7

Exit Decision

Answer 7

• a firm’s long-run decision to leave the market

- zero costs

Question 8

When to Shut Down

Answer 8

• shut down is P

Question 9

Sunk Cost

Answer 9

• a cost that has already been committed and cannot be recovered
• FC are sunk costs

Question 10

When to Exit

Answer 10

• if P

Question 11

When to Enter

Answer 11

• if P > ATC

Question 12

Market Supply Assumpions

Answer 12

• All existing firms and potential entrants have identical costs
• Each firm’s costs do not change as other firms enter or exit the market
• # of firms in the market is fixed in SR, variable in LR

Question 13

Entry/Exit in LR

Answer 13

If existing firms earn positive economic profit

• new forms enter, SR market
• P decreases reducing profits and slowing entry

If existing firms incur losses

• some firms exit, SR market supply shifts left
• P increases, reducing remaining firms’ losses

Question 14

The Zero-Profit Condition

Answer 14

• no more entry/exit and remaining firms earn 0 economic profit
• Occurs where P=ATC
• in the LR P=minATC