Chapter 9

Question 1

FOUR MARKET STRUCTURES

Answer 1

1. Perfect Competition
2. Monopoly
3. Monopolistic Competition
4. Oligopoly

Question 2

CONDITIONS REQUIRED FOR PERFECTLY COMPETITIVE MARKETS

Answer 2

• Very large numbers (so each firm has such a miniscule part of the entire market)
• Standardized product (identical and thus perfect substitutes)
• Price-takers (so small they have no influence over the market price)
• Easy entry and exit (no obstacles to entry or to exit the industy)

Question 3

DEMAND FOR A FIRM IN PERFECT COMPETITION

Answer 3

PERFECTLY ELASTIC DEMAND
* Firm produces as much or as little as they want at the market price (firm cannot obtain higher price by lowering its output, and firm does not need to lower price to sell more)
* individuals firms demand graphs as horizontal line
(market demand graphs as a downward sloping curve)

Question 4

DEMAND FOR A FIRM IN PERFECT COMPETITION formulas

Answer 4

• average revenue
  AR = (TR/Q) = P
• total revenue
  TR = P x Q
• Marginal revenue
  MR = change in TR/ change in quantity

Question 4

DEMAND FOR A FIRM IN PERFECT COMPETITION

Answer 4

• average revenue
  AR = (TR/Q) = P
• total revenue
  TR = P x Q
• Marginal revenue
  MR = change in TR/ change in quantity

Question 5

PROFIT MAXIMIZATION IN THE SHORT RUN

Answer 5

-Since a firm in a perfectly competitive market is a price- taker, it cannot maximize profit by changing its price.
-Perfectly competitive firm can maximize its profit (minimize its loss) only by adjusting output

Question 6

two approaches to porfit maximization in short run

Answer 6

1. total revenue - total cost
2. marginal revenue = marginal cost

Question 7

PROFIT MAXIMIZATION IN THE SHORT RUN: MARGINAL-REVENUE–MARGINAL-COST APPROACH

Answer 7

MR=MC RULE
– Firm produces the last unit of output for which MR > MC
– It only applies if MR > AVC
– It applies for all market structures
– It is P=MC under perfect competition

Question 8

MR=MC RULE

Answer 8

– Firm produces the last unit of output for which MR > MC
– It only applies if MR > AVC
– It applies for all market structures
– It is P=MC under perfect competition

Question 9

MR=MC RULE

Answer 9

– Firm produces the last unit of output for which MR > MC
– It only applies if MR > AVC
– It applies for all market structures
– It is P=MC under perfect competition

Question 10

LOSS MINIMIZATION IN THE SHORT RUN: MARGINAL-REVENUE–MARGINAL-COST APPROACH

Answer 10

LOSS-MINIMIZING CASE
Still produce because P > minAVC
– This loss is less than FC
– Losses at a minimum where MR=MC
The profit-seeking producer should always compare MR (or price under perfect competition) with the rising portion of the MC curve.

Question 11

MARGINAL COST AND SHORT-RUN SUPPLY

Answer 11

Firm’s short-run supply curve is the portion of its MC
curve above minimum AVC
– Firm will not produce at prices below its minimum AVC – Quantity supplied increases as price increases
– Economic profit is higher at higher prices
– The P=MC rule is the key

Question 12

MARGINAL COST AND SHORT-RUN SUPPLY

Answer 12

Firm’s short-run supply curve is the portion of its MC
curve above minimum AVC
– Firm will not produce at prices below its minimum AVC – Quantity supplied increases as price increases
– Economic profit is higher at higher prices
– The P=MC rule is the key

Question 13

DIMINISHING RETURNS, PRODUCTION COSTS, AND
PRODUCT SUPPLY
* Supply curve shifts:

Answer 13

– A wage increase shifts the supply curve upward and to the
left (decreasing in supply)
– Technological progress would shift the supply curve downward to the right (increasing in supply)