Different Market Structures Continued Flashcards
Q: What does a perfect competitor have to accept in the market?
A: The given price of the product.
Q: What happens if a perfect competitor raises its price?
A: It sells nothing.
Q: What is the firm’s decision variable in perfect competition?
A: How much to produce.
Q: Define a perfect competitor.
A: A price taker that accepts the price determined by the market demand and supply.
Q: In perfect competition, what is the relationship between price, average revenue, and marginal revenue?
A: They are all equal.
Q: What is the profit-maximizing level of output?
A: The output level where marginal revenue equals marginal cost (MR = MC).
Q: What happens if marginal revenue (MR) is greater than marginal cost (MC)?
A: The firm should increase output to generate more profits.
Q: What should a firm do if MR < MC?
A: Decrease output to reduce losses.
Q: What is the equilibrium output for a firm in perfect competition?
A: The output level where MR = MC.
Q: What are the three possible equilibrium situations for a firm?
A: Supernormal profit, normal profit, and subnormal profit.
Q: How is supernormal profit identified?
A: When total revenue (TR) is greater than total cost (TC), represented by TR - TC.
Q: What happens in the long run when firms make supernormal profits?
A: More firms enter the industry, increasing supply and reducing prices to normal profit levels.
Q: What is the shutdown point?
A: When the firm is not covering avoidable variable costs, and it is best for the firm to exit the business
Q: What is the break-even point?
A: When average cost equals average revenue (AC = AR), ensuring normal profits are earned.
Q: How do supernormal, normal, and subnormal profits relate to the market equilibrium?
A: They show the firm’s profitability in response to market conditions, with equilibrium adjusting through entry and exit of firms.
