Chapter 22 - The Theory Of Perfect Competition

Question 1

Market Structure

Answer 1

The environment whose characteristics influence a firm’s pricing and output decisions

Question 2

Perfect Competition

Answer 2

A theory of market structure based on four assumptions: (1) there are many sellers and buyers; (2) the sellers sell a homogenous good; (3) buyers and sellers have all relevant information; (4) entry into and exit from the market is easy

Question 3

Price Taker

Answer 3

A seller that does not have the ability to control the price of the product it sells; the seller “takes” the price determined in the market

Question 4

Marginal Revenue (MR)

Answer 4

The change in total revenue (TR) that results from selling one additional unit of output (Q)

Question 5

Profit Maximization Rule

Answer 5

Profit is maximized by producing the quantity of output at which MR=MC

Question 6

Resource Allocative Efficiency

Answer 6

The situation in which firms produce the quantity of output at which P=MC

Question 7

Short Run (Firm) Supply Curve

Answer 7

The portion of the firms marginal cost curve that lies above the average variable cost curve

Question 8

Short-Run Market (Industry) Supply Curve

Answer 8

Horizontal sum of all existing firms short run supply curves

Question 9

Long-Run Competitve Equilibrium

Answer 9

The condition in which P=MC=SRATC=LRATC. Economic profit is zero, firms are producing the quantity of output at which price is equal to marginal cost, and no firm has an incentive to change its plant size

Question 10

Productive efficiency

Answer 10

The situation in which a firm produces its output at the lowest possible per unit cost (lowest ATC)

Question 11

Long-Run (Industry) Supply (LRS) Curve

Answer 11

A graphic representation of the quantity of output that an industry is prepared to supply a different prices after the entry and exit of firms are completed

Question 12

Constant-Cost Industry

Answer 12

And industry in which overage total costs do not change as (industry) output increases or decreases when firms enter or exit the industry, respectively

Question 13

Increasing Cost Industry

Answer 13

And industry and which average total cost increase as output increases and decreases as output decreases when firms enter and exit the industry, respectively

Question 14

Decreasing-Cost Industry

Answer 14

And industry in which average total cost decrease as output increases an increase as output decreases when firms enter and exit the industry, respectively