ECON 101 Chapter Notes - Chapter 12-15: Demand Curve, Profit Maximization, Perfect Competition

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Perfect competition (e. g. oranges: many firms, firms have no market power, each firm is a price taker (takes price set by market, firm has perfectly elastic demand curve (horizontal) b/c fixed price. Identical products: free entry/exit, no control over price, ar = mr = p = d. 3 possible short-run profit-maximizing outcomes for firms: p > atc = economic profit, p = atc = 0 economic profit = break-even point @ min atc, p < atc = economic loss. Increased demand = rising p, economic profit/entry, increased industry supply, causing falling p, enough firms enter so economic profit is eliminated & firms earn normal profit. Change in long-run equilibrium price from a permanent d shift depends on: external economies lower costs, industry output increases, external diseconomies raised costs, industry output decreases. New technology lowers costs, increases industry supply, causes falling p. In long run, all firms use new technology and earn 0 economic profit (normal profit)

Related Questions

30) In the short run, the profit-maximizing behaviour for a price-taking firm requires it to operate where A) P= MC, given that P is greater than or equal to ATC. B) P = TR=TC. C) P> MR>MC. D) AVC = AR. E) P= MC, given that P is greater than or equal to AVC. SRATC SRAVC Price $ A B C F G H I D E Quantity FIGURE 9-1

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.

6. Power Printers Total Costs (per hour)

q TC

0 65

1 80

2 95

3 120

4 150

5 200

If the price of a printer is $50 in this perfectly competitive industry, what is the profit-maximizing rate of output?

7. Which of the following is NOT true in a perfectly competitive market?

a. There is free entry and exit into the industry.

b. Each firm produces a differentiated product.

c. Each firm faces a perfectly elastic demand curve.

d. Price is equal to marginal revenue at every output level for the firm.

8. A perfectly competitive firm should always continue to operate in the short run as long as:

a. P < ATC at the rate of output where MR = MC.

b. P < AVC at the rate of output where MR = MC.

c. MR > AVC at the rate of output where MR = MC.

d. MR > AFC at the rate of output where MR = MC.

9. A firm that makes zero economic profits:

a. Must eventually go bankrupt.

b. Should shut down.

c. Incurs a loss, but should not shut down.

d. Covers all its costs, including a provision for normal profit.

10. A monopoly firm is different from a competitive firm in that:

A. There are many substitutes for the monopolistâs product whereas the competitive firmâs demand curve is perfectly elastic.

B. The monopolistâs demand curve is perfectly inelastic, whereas the competitive firmâs demand curve is perfectly elastic.

C. The monopolist can influence the price in the market, whereas the competitive firm is a price taker.

D. All of the above

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ECON 101 Chapter Notes - Chapter 12-15: Demand Curve, Profit Maximization, Perfect Competition

ECON 101 Full Course Notes

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