Perfect competition

Question 1

main objective of firms

Answer 1

maximise profit

Question 2

two other objectives

Answer 2

revenue max, survival

Question 3

why do we assume profit max

Answer 3

Another reason why firms will want to profit maximise is to increase their market power. A firm which profit maximises will have high supernormal profits, which gives them the ability to predatory price in the future as they will have more retained profits available to sustain themselves at a lower price.

Question 4

law of diminishing marginal returns

Answer 4

As more of a variable factor (e.g. labour) is added to a fixed factor (e.g. capital), a firm will reach a point where it has a disproportionate quantity of labour to capital and so the marginal product of labour will fall, thus raising marginal costs.

Question 5

divorce between ownership and control

Answer 5

large firms are usually owned by shareholders and run by managers, both are self interested.

Question 6

marginal revenue

Answer 6

the additional revenue gained from selling one extra unit in a period of time

Question 7

profit satisficing

Answer 7

occurs where owners of businesses set a minimum acceptable level of achievement in terms of profit, but this gives managers some autonomy in how they price different markets.

Question 8

profit max

Answer 8

MC=MR

Question 9

calculations

Answer 9

ar = tr/output
tc=tfc+tvc
ac=tc/output

Question 10

rev max

Answer 10

mr = 0