ECO101H1 Lecture Notes - Lecture 16: Perfect Competition

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19 Aug 2016

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ECO101H1 Full Course Notes

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For any level of output, firm profits are given by: [p-atc(q)]q. Optimum profit: [p-atc(q*)]q: these are the maximum profits a firm can earn at price p. Break-even price: p = atc(q*) = mc(q*, this occurs at the minimum atc. The existence of profits or losses determines the long-run entry or exit decision of a firm in the industry: exit if profits are negative, stay/enter if profits are positive or zero. In the short run, firms can operate with a profit or loss. The magnitude of the loss will also affect short-run production decisions if p avc(q*), where the surplus can be applied to cover some fixed costs, part where atc > p, where fixed costs are uncovered . Input prices (wages) affects variable costs and marginal costs, and thus total costs.

Related Questions

1. A firm that is a pure competitor has P > ATC and P > MC on the output (Q) it is presently producing and selling. Is this firm maximizing its profits? If not, which direction should it change its output if it wants to maximize its total profit?

2. Is a pure competitor in short-run or long-run equilibrium if it has P=MC=ATC? Explain.

3. There is free entry in the model of pure competition. Assuming that P > ATC for a vast number of firms producing a standardized product for a given market, what will happen to market supply as the consequence? What will happen to the market price (P) of the product these firms are producing?

4. Firms in the pure competition have horizontal demand functions. (The market determines product price, so firms in this competitive market are price takers.) Do firms in this model have to lower prices if they want to sell more output? Why or why not?

copperporcupine291

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

azureshark954

Answer the following Questions for a Monopoly Firm.

Price	Quantity	TR	MR	MC	TC	Profit
$400	0				$2,000
390	1			$200
380	2				2,360
370	3				2,500
360	4
350	5				2,720
340	6
330	7				3,060
320	8			$250
310	9				3,630
300	10			$400
290	11			$500

a) Fill in the missing information above for this Monopoly Firm. Note there are no numbers for MC and MR when Q=0.

To complete the table you need to know that the ATC of producing 4 units of output is $650 and that the Total Variable Cost of producing 6 units of output is $870.

b) State the Total Fixed Cost for this firm. Please explain how you got your answer.

c) At which unit of output does Diminishing Marginal Returns start? Please explain your answer.

d) If this firm produces in the Short Run, determine its profit maximizing/loss minimizing output level. Please explain your answer using MC and MR.

e) If this firm produces in the Short Run, determine its profit maximizing/loss minimizing price.

f) If this firm produces in the Short Run, state its profit maximizing/loss minimizing profit amount.

g) If this firm shuts down in the Short Run, determine its profit maximizing/loss minimizing profit amount. Please explain your answer.

h) What should this firm do in the Short Run in order to maximize its profits/minimize its loss (produce or shut down)? Please explain your answer using numbers.

i) Explain what this firm should do in the Long Run.

raspberryhorse277

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