Chapter 8: Profit Maximization And Competitive Supply

Question 1

What are the assumptions or characteristics of the perfectly competitive market

Answer 1

• Product homogeneity: When the products of all of the firms in a market are homogeneous— no firm can raise the price of its product above the price of other firms without losing most or all of its business.
• Free entry and exit: Condition under which there are no special costs that make it difficult for a firm to enter (or exit) an industry, suppliers can easily enter or exit a market.
• Price taking: Because there are many firms in the market each firm faces a significant number of direct competitors for its products. Firm that has no influence over market price and thus takes the price as given.

Question 2

What is a cooperative

Answer 2

Association of businesses or people jointly owned and operated by members for mutual benefit.

Question 3

What is a condominium

Answer 3

A housing unit that is individually owned but provides access to common facilities that are paid for and controlled jointly by an association of owners.

Question 4

Explain the output rule

Answer 4

If a firm is producing any output, it should produce at the level at which marginal revenue equals marginal cost.

Question 5

What is the short run market supply curve

Answer 5

Shows the amount of output that the industry will produce in the short run for every possible price.

Question 6

What is producer surplus

Answer 6

Producer surplus measures the area below the market price and above the producers supply curve.

Question 7

What is the producer surplus for a market

Answer 7

Is the area below the market price and above the market supply curve

Question 8

Explain zero economic profit

Answer 8

A firm is earning a normal return on its investment—i.e., it is doing as well as it could by investing its money elsewhere.

Question 9

Long run competitive equilibrium occurs when three conditions hold:

Answer 9

1. All firms in the industry are maximising profit.
2. No firm has an incentive to enter or exit the market (because all are earning zero economic profit).
3. Quantity supplied by the industry is equal to quantity demanded.

Question 10

Some instances where firms can earn positive accounting profit with a zero economic profit.

Answer 10

Consider the opportunity costs of owning land, for example, that a clothing store happens to be located near a large shopping center. The additional flow of customers can substantially increase the store’s accounting profit because the cost of the land is based on its historical cost.

Question 11

Explain economic rent

Answer 11

Amount that firms are willing to pay for an input less the minimum amount necessary to obtain it.