Unit 4 - micro

Question 1

requirements for perfect competition

Answer 1

number of firms is large
firms products are identical
free entry and exit
complete information
profit maximizing
buyers/sellers are price takers

Question 2

Free entry

Answer 2

firms are free to enter a market or to expand within a market in response to market signals
barriers are social, political and economic that prevent other firms from entering the market

Question 3

Free exit

Answer 3

exit from an industry without incurring a substantial loss on its investments
There can’t be free entry without free exit

Question 4

Complete information

Answer 4

firms and consumers know all there is to know about the market
no firm or consumers have a competitive edge over the other

Question 5

Profit maximizing

Answer 5

firms seek maximum profit and only profit

Question 6

Price takers

Answer 6

a firm or individual who take the price of determined market supply and demand as given

Question 7

Marginal revenue

Answer 7

in perfect competition marginal revenue is the simply the market price. perfectly elastic
MR= change in total revenue / change in quantity

Question 8

Marginal cost

Answer 8

initially marginal cost falls but then increases

is the supply curve

Question 9

Total cost

Answer 9

TC = ATC x Q

Question 10

Revenue

Answer 10

R = P x Q

Question 11

MR DARP

Answer 11

Marginal revenue = demand = average revenue = price

Question 12

How to determine maximum profit from a graph

Answer 12

plot MRDARP
plot MC
plot ATC
plot AVC
Work out what is the profit maximizing output for the perfectly competitive firm (MR = MC)
Draw a line from MR = MC to the horizontal axis so that you can calculate total revenue
work out TR
work out TC
work out difference between TR and TC