Chapter 9

Question 1

Characteristics of a perfectly competitive market

Answer 1

Very large numbers, price takers (firms have no influence on market price), standardized product (each seller’s product is identical), easy entry and exit in long run.

Question 2

Demand curve

Answer 2

Demand is perfectly elastic since the firm can sell as much output as it wants at the market price. D=MR=AR

Question 3

Demand for perfectly competitive INDIVIDUAL FIRM

Answer 3

perfectly price elastic demand (firm is a price taker, not a price maker), firm cannot increase price, firm can sell all it produces at market price.

Question 4

Demand for a perfectly competitive INDUSTRY

Answer 4

Can only adjust its own output. Firm cannot adjust its selling price.

Question 5

How to calculate TR

Answer 5

TR = price × quantity

Question 6

TR-TC rule

Answer 6

• profit is maximized where the vertical distance between TR and TC is greatest.
• profit=TR-TC
• firm will choose the output level where the “belly” is largest. (Maximum economic profit)
• break-even points are where TR=TC

Question 7

MR-MC rule

Answer 7

-short run profit maximization rule: short run profit maximization occurs where MR (=P)=MC.
-firm should produce last unit for which MR > MC.
-firms shuts down if P < AVC.
-profit/loss calculation:
Find Q where MR=MC
Find ATC
Profit = Q (MR-MC) × ATC