ECON 1B03 Lecture Notes - Lecture 26: Perfect Competition, Profit (Economics), Demand Curve

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24 Oct 2018

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ECON 1B03 Full Course Notes

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Notice that p is ultimate factor in a firm"s production decision. If it tried to charge a p > market p, people would stop buying from it completely. Individual firm"s demand curve in a perfectly competitive market is precisely price level ! So, in perfect competition, for a firm. P = ar = mr = d. When p > atc, a firm makes positive economic profit. These are profits far above what you"d expect a firm to typically make in that industry. When p < atc, a firm makes negative economic profit, a loss. When p = atc, a firm makes zero economic profit. It means a firm is earning a decent return in industry. Firm is still making money, just not atypical profit. You"d still be making an accounting profit. When firm earns zero economic profit, firm is just breaking even (no profits, no losses)

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True or False, and explain (one sentence is sufficient)

A.) If P > ATC then a firms is making economic profit.

B.) In a perfectly competitive industry, it is possible for a firm to earn P > ATC in the long run.

C.) If P = AVC in the long run, then the firm should shut down and exit.

D.) If P < ATC in the short run, then a firm should shut down and exit.

1. If the ATC curve is above the demand curve in a perfectly competitive firm, the firm will have a:

2. If the ATC curve is below the demand curve in a perfectly competitive firm, the firm will have a:

3. Even if in the short run, a perfectly competitive firm has a profit; in the long run, they always break even because:

- low barriers to entry

- profit incentives attract new firms

- perfectly homogenous products

- all of the above

4. A perfect competitor would:

- never charge above market price but might charge below market price

- never charge below market price but might charge above market price

- always change the market price

- none of the above

5. The crucial aspect of competition among firms that leads to the condition of zero profits in the long run is

- the number of firms in the industry is fixed

- free entry and exit of firms in the industry

- fixed costs equal zero

- all costs are at their least cost level.

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QUESTION 22

For a perfectly competitive firm, profit maximization (or loss minimization) occurs at the level of output at which

	a.	MR = MC.
	b.	MR = AVC.
	c.	P = ATC.
	d.	MR = ATC.

4 points

QUESTION 23

If MR > MC, then

	a.	profits are being maximized.
	b.	the firm is producing too much of the good to be maximizing profits.
	c.	the firm can increase its profits (or minimize its losses) by increasing output.
	d.	the firm must be incurring losses.

4 points

QUESTION 24

If firms are earning zero economic profits, they must be producing at an output level at which

	a.	price minus marginal cost.
	b.	total revenue equals total costs, in other words, normal profits.
	c.	price equals average variable cost.
	d.	marginal revenue equals marginal cost.
	e.	none of the above

4 points

QUESTION 25

In the theory of perfect competition,

	a.	the market demand curve is horizontal.
	b.	the single firm faces a horizontal demand curve.
	c.	the single firm faces a downward-sloping demand curve.
	d.	the market demand curve is downward sloping.
	e.	b and d

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ECON 1B03 Lecture Notes - Lecture 26: Perfect Competition, Profit (Economics), Demand Curve

ECON 1B03 Full Course Notes

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