Module 6

Question 1

What are the three requirements for a perfectly competitive market?

Answer 1

• many buyers and sellers
• all firms sell identical products
• no barriers to entry / exit

Question 2

What is the relationship of buyers and sellers to price in a perfectly competitive market?

Answer 2

• individual firms and consumers are price takers

Question 3

What are the four main market structures?

Answer 3

Perfect competition
Monopolistic competition
Oligopoly
Monopoly

Question 4

What are the 3 main characteristics of monopolistic competition?

Answer 4

• Many buyers and sellers
• differentiated product
• no barriers to entry and exit

Question 5

What are the 3 main characteristics of oligopoly?

Answer 5

• few firms
• either identical or differentiated product
• barriers to entry

Question 6

What are the 3 main characteristics of monopoly?

Answer 6

• one firm
• unique product
• entry to market is blocked

Question 7

What’s the formula for MR?

Answer 7

MR = change in TR / change in Q

Question 8

Where is profit maximized?
(3 points)

Answer 8

• the distance between TC & TR is greatest
• slope of TR = slope of TC
• where MR = MC (& = P for perfect competition)

Question 9

What does MR = in a perfectly competitive market?

Answer 9

In a perfectly competitive market, MR = P = AR

Question 10

What is residual demand?

Answer 10

The part of the market demand left over for a firm after the supply of all it’s competitors has been taken into account.

Question 11

What are the two formulas for profit?

Answer 11

Profit = (P * Q) - TC
Profit = (P - ATC) * Q
* remember that firms maximize total profit, not profit per unit.

Question 12

When does a firm incurr a loss?

Answer 12

P < ATC = Loss

Question 13

When does it make sense to keep operating at a loss?

Answer 13

TR > TVC@ profit maximizing Q
P >/= AVC @ profit maximizing Q

Question 14

Where does the MC curve = firm’s supply curve?

Answer 14

As long as P > / = AVC, MC curve = supply curve

Question 15

Where do we find the shutdown point for a firm?

Answer 15

Where MC = AVC = AVC @ it’s lowest

Question 16

What is the size of a loss graphically?

Answer 16

Rectangle between Q where MC= MR, and up to ATC at that Q.

Question 17

How do we find a firm’s supply curve?

Answer 17

• Build an Excel table with all calculations linked
  ○ Make sure there’s a column for price
• Input the various prices and find the places where MR (>)= MC for each given market price.
  ○ If you’re not given market prices, just pick some.
  Basically MC curve = supply curve above P>/= AVC

Question 18

What does economic profit do in a perfectly competitive market?

Answer 18

• Attracts more firms
• Which pushes the supply curve to the right
• Which lowers the market price down to where the average firm’s ATC = MC

Question 19

If P > ATC for the average firm, what happens to the number of firms in a perfectly competitive market?

Answer 19

More firms enter the market until P = ATC

Question 20

If P < ATC, what happens to the number of firms in the market?

Answer 20

Firms will leave the market until P is pushed back up to P = ATC for the average firm.

Question 21

What does the LR supply curve look like in a constant cost industry?

Answer 21

Horizontal

Question 22

What does the LR supply curve look like in an increasing cost industry?

Answer 22

upwards sloping

Question 23

What does the LR supply curve look like in a decreasing cost industry?

Answer 23

Downwards sloping

Question 24

What makes an increasing cost industry?

Answer 24

At least one of the inputs is limited such that as the demand for it increases, the cost of it also increases.

Question 25

What makes a decreasing cost industry?

Answer 25

At least one of the inputs is experiencing economies of scale.

Question 26

What is the LR economic profit in a perfectly competitive market?

Answer 26

LR economic profit = 0 in a perfectly competitive market

Question 27

What does the demand curve for an individual firm look like in a perfectly competitive market?

Answer 27

Demand curve for an individual firm is horizontal in a perfectly competitive market.

Question 28

What does the LR S curve look like in a perfectly competitive market?

Answer 28

LR S curve is horizontal at the price where MC = ATC (ATC is at it’s lowest) in a perfectly competitive market.

Question 29

How much can a producer sell or a buyer buy in a perfectly competitive market before they affect the price?

Answer 29

Sellers and buyers can sell/ consume as much as they want without changing the price.

Question 30

How do we calculate AVC?

Answer 30

AVC = (TC-FC)/Q
*Don’t do this as ATC - FC or else your AVC will be way too low… FC must come out of TC, not ATC.