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ECON 20 Lecture Notes - Lecture 30: Reservation Price, Marginal Cost, Takers

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School
Irvine Valley College
Department
Economics
Course
ECON 20
Professor
mcneil

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Document Summary

In a perfectly competitive market, the firm"s supply curve is simply its marginal cost curve. Market supply is perfectly elastic at the price corresponding to the minimum of the average total cost curve. Since there is free entry in and out of the market, if the price is higher than , more firms will enter increasing supply and decreasing the price. If the price is lower than (the minimum of the average total cost curve), firms will exist reducing supply and increasing the price. Thus in the long run supply is perfectly elastic at (since free exit/entry). Economic rent - the part of the payment for a factor of production that exceeds the owner"s reservation price. Note that the reservation price = implicit + explicit costs. With economic profit, competition pushes it towards zero, but not with economic rent as they have inputs that cannot be reproduced easily e. g. special skills/training.

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Related Questions

Consider a market with many firms that have different cost structures.

Unless shutdown or exit is optimal, every firm expands production until ___________.

A.

marginal product is maximized.

B. marginal revenue, marginal cost, and price are all equal

(MR = MC = P)

C. marginal revenue is equal to the minimum of the short-run average total cost.

D. marginal cost is minimized.

To construct the supply curve in a market with many firms with different cost structures, the ___________.

A.

individual supply curves for each firm are added together.

B.

individual average variable cost curves are added together.

C.

minimums of the​ firms' marginal cost curves are linked together.

D.

minimums of the​ firms' long-run average total cost curves are linked together.

The equilibrium price is the ___________.

A.

​long-run average total cost of the last entrant into the market.

B.

the average marginal cost of the firms.

C.

the long-run average total cost of the first entrant into the market.

D.

minimum of the average variable cost of the smallest firm in the market.

In terms of economic profits, early market entrants earn

(negative

zero

positive)

economic profits and the last entrant earns

(negative

zero

positive)

economic profits.

A perfectly competitive firm will choose to shut down when the (price (marginal revenue)/ average total cost) intersects the marginal cost curve below the ( total cost curve average variable cost curve ).

Therefore, the short-run supply curve for a perfectly competitive firm is represented by __________.

A. the portion of the average variable cost curve below marginal cost. B. the portion of the average variable cost curve above marginal cost. C. the portion of the marginal cost curve above the average total cost. D. the portion of the marginal cost curve above average variable cost.

In the long run, the supply curve for a perfectly competitive firm is represented by __________.

A. the portion of the marginal cost curve above the average total cost. B. the portion of the marginal cost curve above average variable cost. C. the portion of the average variable cost curve below marginal cost. D. the portion of the average variable cost curve above marginal cost.

In a competitive market with identical firms:

1. free entry and exit into the market requires that firms earn zero economic profit in the long run even though they may be able to earn positive economic profit in the short run.

2. firms can earn positive economic profit in the long run if the long-run market supply curve is upward sloping.

3. an increase in demand in the short run will result in a new price above the minimum of average total cost, allowing firms to earn a positive economic profit in both the short run and the long run.

4. firms cannot earn positive economic profit in either the short run or long run.

In a competitive market with identical firms,

a.; free entry and free exit into the market require that firms earn zero economic profit in the long run even though they may be able to earn economic profits in the short run.

b. firms can earn economic profits in the long run if the long-run supply curve is upward sloping

c. an increase in demand in the short run will result in a new price above the minimum of the average total cost allowing the firms to earn a positive economic profit in both the short run and the long run 

d. firms can earn a positive economic profit in either the short run or the long run.