Chapter 9: firms in a competitive market

Question 1

When do competitive markets exist

Answer 1

When there is multiple buyers and sellers than each only has a small impact on the market price and output

Question 2

WHat can consumers expect

Answer 2

Consistent low prices and wide avaliability

Question 3

Price taker

Answer 3

No control over the price set by the market

Question 4

3 Characteristics of a competitive market

Answer 4

Many buyers and sellers, similar products, easy entry into the market

Question 5

Profit maximizing rule

Answer 5

states that profit maximization occurs when a firm chooses the quantity of output that equates the Marginal revenue and the Marginal cost

Question 6

When should firms stop producing

Answer 6

MR=MC

Question 7

What rule do firms abide by to decide if they should stay open or close

Answer 7

A business should continue to operate if it can cover its variable costs.

Question 8

Will the firm opperate if the MR curve is greater than the minimum point on the Average varibale cost curve

Answer 8

Yes

Question 9

P>ATC

Answer 9

Economic profit

Question 10

P<ATC

Answer 10

Economic loss

Question 11

How do you calculate economic profit

Answer 11

Total revenue - (explicit costs - Implicit costs)

Question 12

What are the two options a firm has in the short run

Answer 12

To produce at MC=MR or shutdown

Question 13

What are the firms options in the long run?

Answer 13

The firm can either exit, enter or stay in market

Question 14

In the short run what happens when P>ATC

Answer 14

firm makes a profit

Question 15

In the short run what happens when ATC>P>AVC

Answer 15

Firm will operate to minimize loss

Question 16

In the short run what happens when AVC>P

Answer 16

Firm will temporarily shutdowm

Question 17

In the long run what happens when P>ATC

Answer 17

firms make a profit

Question 18

In the long run what happens when P<ATC

Answer 18

firms should shut down

Question 19

Sunk costs

Answer 19

Unrecoverable costs, can not be returned

Question 20

During long run equilibrium in a competitive market what happens to the two types of profit

Answer 20

Economic profit is zero, accounting profit is positive

Question 21

In the long run what signals are firms being sent

Answer 21

There are no entry or exit signals being sent in the LR

Question 22

The MR curve for a price taker is

Answer 22

horitzontal

Question 23

Why is the MR curve for a price taker horizontle

Answer 23

Because a price taker can sell as much as it wants, and the additional revenue will be constant

Question 24

When should a firm shutdown

Answer 24

If the Price is less than the average variable cost (AVC)

Question 25

The demand curve for a perfectly competitive firm is

Answer 25

Perfectly elastic

Question 26

How will a perfectly competitive firm decide the optimal level of production

Answer 26

by equating the marginal revenue with the marginal costs

Question 27

In markets characterized by competition we find_

Answer 27

lower prices, greater outputs

Question 28

WHat happens to the short run market supply curve when a firm enters the market and what does this do to profits

Answer 28

The supply curve shifts to the right and the profit decrease

Question 29

what plays a significant role in signaling where to guide resources in the market

Answer 29

entry/exit by firm

Question 30

what does losses signal to economists

Answer 30

there are too many firms in the industry