Firms in Competitive Markets

Question 1

Characteristics of a competitive market

Answer 1

many buyers and sellers, goods are identical, and firms can freely enter/exit the market

Question 2

how to solve for total revenue

Answer 2

quantity times price (Q x P)

Question 3

average revenue

Answer 3

how much revenue a firm receives for the typical unit sold

average revenue equals the price of a good

Question 4

Marginal revenue

Answer 4

change in total revenue from the sale of each additional unit of output

Question 5

How to see the change in profit

Answer 5

Comparing marginal revenue and marginal coast of each unit produced

When marginal revenue is greater than marginal cost, increasing the quantity produced raises profit

Question 6

The market price line is a ____ line

Answer 6

Horizontal

the competitive firm is a price taker (the price of the firm’s output stays the same no matter what)

Question 7

The market price line equals to the

Answer 7

marginal revenue (in competitive firms only!)

Question 8

Where does the firm maximize profit?

Answer 8

Where the marginal cost equals the marginal revenue (Qmax)

Question 9

If marginal revenue is greater than marginal cost…

Answer 9

the firm should increase its output

Question 10

If marginal cost is greater than marginal revenue

Answer 10

firm should decrease its output

Question 11

The marginal-cost curve is the competitive firm’s supply curve because it determines what?

Answer 11

the quantity of the good the firm is willing to supply at any price

Question 12

Shutdown

Answer 12

Short-run decision not to produce anything because of market conditions

if shut down in SR, they must still pay fixed cost

Question 13

Exit

Answer 13

A long-run decision to leave the market (zero costs)

Question 14

Pros and Cons in Short-run Decision

Answer 14

Cost of shutting down: revenue loss=total revenue

benefit of shutting down: cost savings equals variable costs

when shut down, total revenue is greater than variable costs

Question 15

Sunk cost

Answer 15

a cost that has already been committed to and can’t be recovered

pay them regardless of chose

fixed costs=sunk costs, they have to pay it no matter what

Question 16

Pros and cons of the long-run decision to exit

Answer 16

Cons: revenue loss=total revenue

Benefits of exiting the market: cost savings equal total costs (total revenue is greater than total costs)

Question 17

When do you enter a market?

Answer 17

when profit is higher than average total cost

Question 18

Formulas to find profit

Answer 18

Profit=TR-TC

Profit: (P-ATC) x Q

Question 19

A competitive firm’s short-run supply curve is the ____ cost curve above its ____cost curve

Answer 19

marginal; average-variable

Question 20

With individual firms…

Answer 20

the quantity of output supplied to the market equals the sum of the quantities supplied by each firm

Question 21

The supply curve in the long run

Answer 21

the price equals marginal cost (firm maximizes profit)

price also equals average total cost (profit is zero, no incentive to enter or leave the market)

must be horizontal to the price

Question 22

zero-profit equilibrium

Answer 22

firm’s revenue mist compensate the owners for these opportunity costs

Question 23

why does the long-run supply curve slope upwards?

Answer 23

resources may be available in limited quantities

firms may have different costs