Different Market Structures Continued Flashcards

1
Q

Q: What does a perfect competitor have to accept in the market?

A

A: The given price of the product.

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2
Q

Q: What happens if a perfect competitor raises its price?

A

A: It sells nothing.

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3
Q

Q: What is the firm’s decision variable in perfect competition?

A

A: How much to produce.

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4
Q

Q: Define a perfect competitor.

A

A: A price taker that accepts the price determined by the market demand and supply.

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5
Q

Q: In perfect competition, what is the relationship between price, average revenue, and marginal revenue?

A

A: They are all equal.

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6
Q

Q: What is the profit-maximizing level of output?

A

A: The output level where marginal revenue equals marginal cost (MR = MC).

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7
Q

Q: What happens if marginal revenue (MR) is greater than marginal cost (MC)?

A

A: The firm should increase output to generate more profits.

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8
Q

Q: What should a firm do if MR < MC?

A

A: Decrease output to reduce losses.

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9
Q

Q: What is the equilibrium output for a firm in perfect competition?

A

A: The output level where MR = MC.

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10
Q

Q: What are the three possible equilibrium situations for a firm?

A

A: Supernormal profit, normal profit, and subnormal profit.

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11
Q

Q: How is supernormal profit identified?

A

A: When total revenue (TR) is greater than total cost (TC), represented by TR - TC.

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12
Q

Q: What happens in the long run when firms make supernormal profits?

A

A: More firms enter the industry, increasing supply and reducing prices to normal profit levels.

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13
Q

Q: What is the shutdown point?

A

A: When the firm is not covering avoidable variable costs, and it is best for the firm to exit the business

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14
Q

Q: What is the break-even point?

A

A: When average cost equals average revenue (AC = AR), ensuring normal profits are earned.

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15
Q

Q: How do supernormal, normal, and subnormal profits relate to the market equilibrium?

A

A: They show the firm’s profitability in response to market conditions, with equilibrium adjusting through entry and exit of firms.

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16
Q

Q: What is the role of price controls in a monopoly?

A

A: To shift the equilibrium towards the perfectly competitive level, potentially reducing or eliminating supernormal profits.

17
Q

Q: What is allocative efficiency?

A

A: When resources are used most efficiently, achieved when MC = AR (demand) in perfect competition.