Chapter 9A IDEK

Question 1

The demand curve for an individual price-taking business in perfect competition is also a marginal revenue curve — a horizontal line at the market price.

Answer 1

The demand curve for an individual price-taking business in perfect competition is also a marginal revenue curve — a horizontal line at the market price.

Question 2

In the market structure of perfect competition, each small, identical business is a price-taker.

Answer 2

– Because each business can sell as much output as it can produce at the market price, there is no need to lower price to sell more.
– Marginal revenue equals price.
– Each business’s individual demand curve — a horizontal line at the market price — is also its marginal revenue curve.

Question 3

More Gets You Less: Costs and Diminishing Marginal Productivity

Answer 3

Because of diminishing marginal productivity, marginal costs increase as output increases, and the average total cost curve is U-shaped.

Question 4

A business’s Total Cost

Answer 4

= Total Fixed Costs + Total Variable Costs

Question 5

A business’s Total Cost = Total Fixed Costs + Total Variable Costs

Answer 5

– Fixed costs
– Variable costs \

Question 6

Fixed costs

Answer 6

Do not change with quantity of output produced; include normal profits (compensation for a business owner’s time and money – average profits in all industries).

Question 7

Variable costs

Answer 7

— change with changes in the quantity of output produced.

Question 8

Total Product

Answer 8

— total output labour produces when working with all fixed inputs.

Question 9

Marginal product

Answer 9

— additional output from hiring one more unit of labour.

Question 10

Diminishing marginal productivity

Answer 10

— as you add more of a variable input to fixed inputs, the marginal product of the variable input eventually diminishes.

Question 11

As more labourers produce more output, diminishing marginal productivity increases marginal costs (MC)

Answer 11

– The marginal cost curve slopes upward to the right.
– Marginal cost can be calculated as the change in total cost of producing an additional unit of output.

Question 12

Average Total Cost (ATC) — total costs per unit of output

Answer 12

– Total costs divided by quantity
– ATC curve is U-shaped — as output increases, ATC first decreases, then increases.
– Where MC is less than ATC, ATC is decreasing.
– Where MC is greater than ATC, ATC is increasing.
– Where MC equals ATC (MC and ATC curve intersect), ATC is at its minimum.

Question 13

Recipe for profits in perfect competition is to find the highest quantity for which marginal revenue (MR) is greater than marginal costs (MC).

Answer 13

– If , the business earns maximum total profits.
– If , the business increases quantity of output to increase profits.
– If , the business decreases quantity of output to increase profits.

Question 14

Law of Supply

Answer 14

— if the price of a product or service rises, the quantity supplies increases. Three reasons why higher prices create incentives for increased quantity supplied:

Question 15

— if the price of a product or service rises, the quantity supplies increases. Three reasons why higher prices create incentives for increased quantity supplied:

Answer 15

– Higher prices are necessary to cover increasing marginal opportunity costs that arise because inputs are not equally productive in all activities.
– Higher prices can bring higher profits, whether marginal costs are increasing or constant.
– Higher prices are necessary to cover increasing marginal costs that arise from diminishing marginal productivity.

Question 16

The marginal cost and marginal revenue curves are most important for finding a business’s short-run equilibrium — the quantity of output yielding maximum total profits. Economic profits may be positive or negative (economic losses) in short-run equilibrium.

Answer 16

The marginal cost and marginal revenue curves are most important for finding a business’s short-run equilibrium — the quantity of output yielding maximum total profits. Economic profits may be positive or negative (economic losses) in short-run equilibrium.

Question 17

The average total cost (ATC) curve is most important for finding a business’s long-run equilibrium, where economic profits are zero.

Answer 17

The average total cost (ATC) curve is most important for finding a business’s long-run equilibrium, where economic profits are zero.

Question 18

Economic profits (or losses) per unit

Answer 18

= Price – ATC

Question 19

Scenario One

Answer 19

— Economic losses are red lights, signalling businesses to exit an industry, decreasing industry supply. Market price rises, businesses keep exiting, and industry supply keeps shifting leftward until price rises to equal ATC, covering all opportunity costs of production.

Question 20

Three economic profit scenarios

Answer 20

Scenario 1
Scenario 2
Scenario 3

Question 21

Scenario Two

Answer 21

The breakeven point for a business is the price and quantity combination with zero economic profits. This is a yellow light, signalling businesses are breaking even and just earning normal profits. There is no incentive for businesses to exit or enter the industry, and no change in industry supply.

Question 22

Scenario Three

Answer 22

— Economic profits are green lights, signalling businesses to enter an industry, increasing industry supply. Market price falls, businesses keep entering, and industry supply keeps shifting rightward until price falls to just equal ATC, covering all opportunity costs of production.

Question 23

In long-run equilibrium, each business is producing efficiently, at the lowest possible average total cost.

Answer 23

In long-run equilibrium, each business is producing efficiently, at the lowest possible average total cost.

Question 24

Economic profits and losses act as an invisible hand, directing business owner’s interest in profits so that the market produces the products and services that consumers value the most.

Answer 24

Economic profits and losses act as an invisible hand, directing business owner’s interest in profits so that the market produces the products and services that consumers value the most.