Module 7 - Perfect Competition

Question 1

A ___ is a supply curve that represents the short-run relationship between P=MR and Qs; for a perfectly competitive firm, it’s the portion of the MC curve that is at or above the minimum point of the AVC curve.

Answer 1

Short-run supply curve

Question 2

If π = 0, firms generate ___.

Answer 2

Normal profit

Question 3

When drawing a demand line for a perfectly competitive market the line is ___.

Answer 3

Flat and horizontal due to the producer being a price taker

Question 4

The ___ rule states that if a firm chooses to maximize its profits, it must choose that level of output where Marginal Cost (MC) is equal to Marginal Revenue (MR) and the Marginal Cost curve is rising. In other words, it must produce at a level where MC = MR.

Answer 4

Profit Maximization

Question 5

Shut down temporarily is a ___ decision while a decision to exit an industry is made only in ___.

Answer 5

Short-run

Long-run

Question 6

Can perfectly competitive firms generate losses?

Answer 6

Yes

Question 7

___ is the level of profit that occurs when TR = TC and indicates that a firm is doing just as well as it would have if it had chosen to use it’s resources to produce a different product to compete in a different industry; also zero economic profit.

Answer 7

Normal profit

Question 8

___ is an industry in which firms’ cost structure does not vary with changes in production.

Answer 8

Constant cost industry

Question 9

___ is the change in a firms TR that results from a unit change in output produced and sold.

Answer 9

Marginal revenue (MR)

Question 10

Determine if this market can be reasonably described as perfectly competitive:

1. Running shoes
2. Cucumbers
3. Cell phones
4. Cotton
5. Chlorine

Answer 10

1. CANNOT be perfectly competitive (not standardized)
2. Perfectly Competitive (standardized)
3. CANNOT be perfectly competitive (not standardized)
4. Perfectly Competitive (standardized)
5. Perfectly Competitive (standardized)

Question 11

___ occurs when firms produce the G and S that are most wanted by consumers in which a way that MB = MC.

Answer 11

Allocative efficiency

Question 12

In the short run, as prices rise, Qs ___.

Answer 12

Rises

Question 13

The demand curve for perfectly competitive market is a flat horizontal line at the market price and is also called ___.

Answer 13

Perfectly elastic

Question 14

If π < 0, firms generate ___.

Answer 14

A loss

Question 15

___ is the price below ATC which a firm will choose not to operate in the short run; numerically – MR = MC @ATC; graphically – P = MR intersects MC @ATC.

Answer 15

Shut-down point

Question 16

___ occurs when firms produce output at the lowest possible ATC of production using the fewest resources possible to produce a G or S.

Answer 16

Productive efficiency

Question 17

Zero accounting profit is ___.

Answer 17

an undesirable position for a firm (incentive to exit an industry)
Means it’s not making money

Question 18

If π > 0, firms generate ___.

Answer 18

Economic profit

Question 19

___ are firms who take or accept the market price and have no ability to influence that price.

Answer 19

Price takers

Question 20

___ is the level of profit that occurs when TR is greater than TC.

Answer 20

Economic profit

Question 21

Normal, or zero, economic profit is ___.

Answer 21

a suitable position for a firm (strong enough incentive to continue in industry)
Does NOT mean it’s not making money

Question 22

___ is a market structure characterized by interaction of large numbers of buyers and sellers in which the sellers produce a standardized product; sellers are price takers.

Answer 22

Perfect competition

Question 23

A ___ is a level of profit that occurs when TR is less than TC.

Answer 23

Loss

Question 24

If a firm’s P < AVC, then ___.

Answer 24

Shut down and pay only fixed costs and hope that production can be reinstated in the future

Question 25

The four characteristics of a perfectly competitive market are:

1. ___
2. ___
3. ___
4. ___

Answer 25

1. Large number of buyers and sellers
2. Standardized product
3. Producers are price takers
4. Easy entry and exit

Question 26

P = ___ = ___

Answer 26

MR = AR

Question 27

If a firm’s AVC ≤ P < ATC, then ___.

Answer 27

Produce at a loss

Question 28

π is ____.

Answer 28

Profit

Question 29

___ DO NOT have control over the prices they charge for their output and are price takers.

Answer 29

Perfectly competitive firms

Question 30

At the price where firms break-even and generate normal profits the market is considered both ___ and ____.

Answer 30

Productively and allocatively efficient

Question 31

___ is a market condition in which firms do not face incentives to enter or exit the market and firms earn a normal profit; generally occurs when MP = minimum ATC.

Answer 31

Long-run equilibrium

Question 32

___ is the revenue per unit.

Answer 32

Average revenue (AR)

Question 33

___ is a supply curve that represents the long-run relationship between P and Qs.

Answer 33

Long-run supply curve

Question 34

Calculating profit (π) requires 3 pieces of information:

1. ___
2. ___
3. ___

Answer 34

1. Price
2. Q
3. ATC

Question 35

A firm’s ___ curve is that portion of the MC curve that is set at or above the minimum point of the AVC curve.

Answer 35

Short-run supply

Question 36

In a typical perfectly competitive firm, over time firms will ___ because ___.

Answer 36

Enter market

Economic profits are higher than normal economic profits