Chapter 9

Question 1

What is a competitive market

Answer 1

One that encompasses a very large number of suppliers, producing a similar or identical product

Question 2

Is the real market is a monopoly or perfect competition?

Answer 2

Most sectors of the economy lie somewhere between these limiting cases

Question 3

What is perfect competition?

Answer 3

industry is one in which many suppliers, producing an identical
product, face many buyers, and no one participant can influence the market.

Free exit/free entry

Buyer and seller has full information (For example,
buyers know that the products of different suppliers really are the same in quality.)

Question 4

What is the goal of competitive suppliers

Answer 4

Profit maximization-they seek to maximize the

difference between revenues and costs.

Question 5

the difference in price policy in monopoly and competitive market

Answer 5

its actions have no perceptible impact on the
market price for the good or service being traded. Each firm is therefore a price taker—in contrast
to a monopolist, who is a price setter.

Question 6

How the policy that of price taking is reflected in the demand curve

Answer 6

The demand curve facing individual firm is horizontal at the going market price-infinitely elastic

Question 7

in perfectly competitive markets, there are 2 demand curves:

Answer 7

One facing the firm and one facing the market

the demand
curve facing the perfectly competitive firm is horizontal, or infinitely elastic. In contrast, the demand curve facing the whole industry is downward sloping.

Question 8

If the firm’s goal is profit-maximization that what plays a key role

Answer 8

MC

Question 9

What is marginal revenue

Answer 9

Marginal revenue is the additional revenue accruing to the firm resulting from the
sale of one more unit of output

Question 10

In perfect competition, a firm’s marginal revenue (MR) is

Answer 10

the price of the good and also marginal cost

Question 11

What is the optimal quantity supplied by one firm in competitive market

Answer 11

where MC intersects with demand facing individual firm

Question 12

When firm can cover its variable costs

Answer 12

When p>AVC

Question 13

What is sunk costs and when business should still run with them

Answer 13

If the firm has sunk its fixed costs, it should stay in production even if it cannot cover all of its costs

Question 14

MC curve cuts the AVC and ATC at their

Answer 14

minima

Question 15

in the graph where we can find shut-down point and break-even point, if we have the curves for MC,ATC,AVC

Answer 15

MC and AVC intersection-shut-down point- P1

ATC and MC- break-even point-P3

Question 16

MC and AVC intersection-shut-down point- P1

ATC and MC- break-even point-P3

What happens between P1 and P3 in the long run and the short run

Answer 16

Between prices P1 and P3, the producer can cover variable, but not
total, costs and therefore should produce in the short run if fixed costs are
‘sunk’. In the long run the firm must close if the price does not reach P3.
Profits are made if the price exceeds P3

Question 17

What is break-even point

Answer 17

Under that point the producer does not generate any profit

Question 18

What is shut-down price and break-even price

Answer 18

The shut-down price corresponds to the minimum value of the AVC curve.

The break-even price corresponds to the minimum of the ATC curve

Question 19

What is the firm’s short-run supply curve

Answer 19

portion of the MC curve above the minimum

of the AVC.

Question 20

How the industry supply is obtained

Answer 20

by summing the firms’ supply quantities across all firms in the industry.

Question 21

When does short-run equilibrium occurs in short run

Answer 21

Short-run equilibrium in perfect competition occurs when each firm maximizes
profit by producing a quantity where P = MC, provided the price exceeds the minimum
of the average variable cost

Question 22

What is normal profit

Answer 22

Reflect the opportunity cost of production

Firms do not operate in the long run if they cannot make normal profits

Question 23

What is supernormal/economic profits

Answer 23

Profits above normal profits that induce firms to enter an industry
P>ATC

Question 24

Long-run equilibrium for industry supply

Answer 24

P=minimum ATC

Question 25

What profits will determine number of firms in the market

Answer 25

economic profits rather than accounting profits will determine the equilibrium number of firms in the long term

Question 26

Profit per unit on the graph

Answer 26

At the price PE, a profit-making firm supplies the quantity qE, as determined by its MC curve. On average, the cost of producing each unit of output, qE, is defined by the point on the ATC at that output level, point k. Profit per unit is thus given by the value (m−k) – the difference between revenue per unit and cost per unit.

Question 27

How far will the price fall, and how many new firms will enter this profitable industry?

Answer 27

A long-run equilibrium in a competitive industry requires a price equal to the minimum point of a firm’s ATC. At this point, only normal profits exist, and there is no incentive for firms to enter or exit.

Question 28

In the long run perfect competition ensures ____

Answer 28

That economic profits are zero

Question 29

The equilibrium long-run price equals to

Answer 29

minimum of the LAC

Question 30

What is long-run industry supply

Answer 30

Industry supply in the long run in perfect competition is horizontal at a price corresponding to the minimum of the representative firm’s long-run ATC curve

Question 31

How will look LR industry supply if the industry has increasing/decreasing costs

Answer 31

Increasing- higher horizontally than constant cost LR supply and up in the end The opposite for decreasing

Question 32

How the cost structure of many goods has been reduced

Answer 32

outsourcing to lower-wage economies.

Question 33

Globalization reduces ___

Answer 33

The cost of components

Question 34

What are intermediate goods

Answer 34

components are produced in numerous low-wage economies, imported to North America and assembled into computers domestically. Such components are termed intermediate goods.