Chapter 7.3

Question 1

Price taker

Answer 1

Someone that cannot influence price and must accept the equilibrium price determined by the market

Question 2

What is the demand for a good for a perfectly competitive firm look like?

Answer 2

Perfectly elastic, horizontal at the price determined in the market for that good

Question 3

For a perfectly competitive firm, what is constant regardless of quantity of output produced and what is the value of that constant?

Answer 3

P = MR = AR at the level of the horizontal demand curve

Question 4

What are the steps for determining short-run profit maximization using marginal revenue and marginal cost?

Answer 4

1. Find the point where marginal revenue equals marginal cost to determine profit-maximizing level of output
2. Compare average revenue and average cost to determine the amount of profit per unit of output
3. Find total profit

Question 5

At the profit-maximizing level of output, when does a firm make abnormal profit?

Answer 5

When AR > AC

Question 6

At the profit-maximizing level of output, when does a firm make normal profit?

Answer 6

When AR = AC

Question 7

At the profit-maximizing level of output, when does a firm make a loss?

Answer 7

When AR < AC

Question 8

What happens in the perfectly competitive long-run?

Answer 8

Firms’ profits and losses are eliminated and every firm earns normal profit

Question 9

When is allocative efficiency reached from an individual firm’s point of view?

Answer 9

When P = MC

Question 10

Insights provided by the perfect competition model

Answer 10

Allocative efficiency
Low prices for consumers
Competition leads to the closing down of inefficient producers
The market responds to consumer tastes

Question 11

Limitations of the perfect competition model

Answer 11

Unrealistic assumptions
Cannot take advantage of economies of scale
Lack of product variety
Limited ability to engage in new product development