chapter 9

Question 1

market structure

Answer 1

all features of a market that affect the behavior and performance of firms in that market, such as the number and size of sellers, the extent of knowledge about another’s actions, the degree of freedom of entry, and the degree of production differentiation

Question 2

market power

Answer 2

the ability of a firm to influence the price of its product

Question 3

competitive behavior

Answer 3

degree to which individual firms actively vie with one another for business

Question 4

perfectly competitive market

Answer 4

no need for firms to compete actively with one another bc none has any power over the market;

all firms are price TAKERS

Question 5

homogeneous product

Answer 5

in the eyes of purchasers, every unit of the product is identical to every other unit

Question 6

assumptions of perfect competition (4)

Answer 6

1. all firms in the industry sell an identical product (homogeneous product)
2. consumers know the nature of the product being sold and the prices charged by each firm
3. the level of each firm’s output at which its LRAC reaches a minimum is small relative to the industry’s total output (each firm is small relative to the size of the industry)
4. the industry is characterized by freedom of entry and exit; that is, any new firm is free to enter and start producing if it so wishes, and any existing firm is free to cease production and leave the industry. Existing firms cannot block the entry of new firms, and there are no legal prohibitions or other barriers to entering or exiting the industry

Question 7

price taker

Answer 7

a firm that can alter its output and sales without affecting the market price of tis product

Question 8

what shape is the demand curve of a perfectly competitive firm?

Answer 8

horizontal (variations in the firm’s output have no significant effect on market price)

Question 9

total revenue

Answer 9

total receipts from the sale of a product

P x Q

Question 10

average revenue

Answer 10

total revenue divided by quantity sold (TR/Q); market price when all units are sold at the same price

Question 11

marginal revenue

Answer 11

the change in a firm’s total revenue resulting from a change in its sales by one unit
dTR/dQ

Question 12

if the market price is unaffected by variations in the firm’s output, what does the firm’s demand curve, average revenue curve, and marginal revenue curve look like?

Answer 12

they all coincide in the same horizontal line

Question 13

what does it mean when the price equals marginal revenue?

Answer 13

firm is in perfect competition

Question 14

what kind of factors play a role in the short-run?

Answer 14

• at least one fixed factor

- variable factor inputs change output

Question 15

what 2 questions to ask for a competitive firm?

Answer 15

1. should the firm produce any output at all or would it be better to shut down and produce nothing?
2. what level of output should it produce?

Question 16

when should a firm not produce?

Answer 16

if for all levels of output, total revenue is less than total variable cost OR if the market price (p) is less than average variable costs (AVC)

Question 17

shut-down price

Answer 17

price that is equal to the minimum of a firm’s average variable costs. at prices below this, profit maximizing firm will shut down and produce no output

Question 18

if it is worthwhile for the firm to produce at all, the firm should produce the output at which…

Answer 18

marginal revenue = marginal cost

Question 19

the perfectly competitive firm adjusts its level of output in response to…

Answer 19

changes in the market-determined price

Question 20

a profit-maximizing firm that is operating in a perfectly competitive market will produce the output that equates to…

Answer 20

marginal cost of production with the market price of its product (as long as p > AVC)

Question 21

a competitive firm’s supply curve is given by

Answer 21

the proportion of tis marginal cost curve that is above its AVC curve

Question 22

in a perfect competition, the industry supply curve is…

Answer 22

the horizontal sum of marginal cost curves of all firms in the industry

Question 23

when an industry is in short-run equilibrium, quantity demanded…

Answer 23

equals quantity supplied, and each firm is maximizing its profits given the market price

Question 24

short-run equilibrium

Answer 24

for a competitive industry, the price and output at which industry demand equals short-run industry supply, and all firms are maximizing their profits. either profits or losses for individual firms are possible`

Question 25

when do new firms come about?

Answer 25

when they see profits in a competitive industry

Question 26

what happens to price when new firms enter an industry?

Answer 26

pushes price down until economic profits fall to zero

Question 27

when do firms exit an industry?

Answer 27

when there are losses in a competitive industry

Question 28

what happens to price when firms exit an industry?

Answer 28

market prices are driven up until remaining firms are just covering their total costs

Question 29

what determines the speed of a firm’s exit from an industry?

Answer 29

the longer it takes for firms’ capital to become obsolete or too costly to operate, the longer firms will remain in the industry while they are earning economic losses

Question 30

sunk cost

Answer 30

costs that could never be recovered

Question 31

non-sunk costs

Answer 31

costs that could be recovered by the firm by such means a selling its capital or terminating its rental agreement for its factory

Question 32

if firms costs are mostly sunk costs…

Answer 32

process of exit in loss-making industries will be slow