EC120 Lecture Notes - Lecture 8: Marginal Revenue, Profit Maximization, Marginal Cost

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A perfectly competitive market has three main features: goods offered by sellers are largely the same (homogeneous goods, many buyers and many sellers. No single buyer or seller affects the market price - price takers: firms may enter and exit the industry. Average revenue = total revenue/quantity = price. Marginal revenue = price = average revenue. Basic assumption - firms maximize economic profit. With competitive firms: price minus marginal cost. If increasing quantity creates more profit increase quantity. If marginal profit is positive - increase quantity. If reducing quantity generates more profit decrease quantity. If marginal profit is negative - decrease quantity. If marginal profit = zero - profit maximizing quantity. Firm produces nothing - pay fixed costs, no revenue. 1 = p q tc = p q fc vc. 1 = p q fc vc fc = 0. Cancel fixed costs, divide by quantity produce if:

Related Questions

Which of the following is not necessarily a characteristic of perfect competition? (Points: 1)

low prices
a large number of buyers and sellers
a homogeneous product
perfect information

2. In the short run, a perfectly competitive ball bearing manufacturer will continue to produce at a loss if (Points :1)
it is covering all of its variable cost plus part of its fixed cost

it is covering all of its fixed cost
variable cost is less than the fixed cost
fixed cost is zero

3. The golden rule of profit maximization states that any firm maximizes profit by producing where (Points :
marginal revenue equals marginal cost
demand is unit elastic, and total revenue is the greatest
price equals marginal revenue
price equals marginal cost

4. Which of the characteristics of perfect competition assures that economic profit will be zero in the long run? (Points: 1)
There are easy entry and exit in the market.
Each firm is a price taker.
Each firm has access to perfect information.
Each firm is small relative to the market.

5. A constant-cost industry is distinguished by the fact that(Points: 1)
firms' short-run average total costs are horizontal
firms' short-run marginal cost curves are horizontal
the long-run industry supply curve is perfectly elastic
the short-run industry supply curve is perfectly elastic

6. Commodity products are (Points: 1)
pasteurized
bland
perceived by consumers to be identical
made by one manufacturer

7. In a perfectly competitive industry we are likely to find(Points: 1)
firms producing a wide variety of products
barriers to entry
no profit possible in the short run
firms that do not advertise

8. Perfectly competitive firms are price takers because (Points :1)
all small firms must take the price set by the largest firm in the market
firms take the price that government determines is a "fair" price
each firm is small and goods are perfect substitutes for one another
free entry and exit in the short run creates a constant market price in the long run

9. In perfect competition, if one firm raises its price, (Points :1)
others will follow
that firm will increase its revenues
that firm will lose revenues because other firms will not follow
all consumers will be adversely affected

10. Suppose, at its present rate of output, a perfectly competitive firm's marginal revenue exceeds both its marginal cost and its average variable cost. To maximize profit, the firm should (Points: 1)
lower the price
raise the price
increase output
reduce output

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11. When firms have an incentive to exit a competitive market, their exit will:

a. drive down market prices.

b. drive down the profits of existing firms in the market.

c. decrease the quantity of goods supplied in the market.

d. All of the above are correct.

12. If a perfectly competitive firm currently produces where the price is greater than the marginal cost, it:

a. will increase its profits by producing more.

b. will increase its profits by producing less.

c. is making positive economic profits.

d. is making negative economic profits.

13. Does a consumer well being vary along a demand curve?

a. Yes. When price increases, consumers move to a lower indifference curve.

b. Yes. When price increases, consumers move to a higher indifference curve.

c. No. When price increases, consumers stay on the same indifference curve.

d. No. When price increases, the higher price has no effect on budget constraints or indifference curves.

e. None of the above

14. If a competitive firm sets its output such that marginal revenue, marginal cost, and average total cost are equal, economic profit must be:

a. Negative

b. positive

c. Zero

d. Indeterminate from the given information

15. Which of the following is a characteristic of a perfectly competitive market?

a. Firms are price setters.

b. There are few sellers in the market.

c. Firms can exit and enter the market freely.

d. All of the above are correct.

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EC120 Lecture Notes - Lecture 8: Marginal Revenue, Profit Maximization, Marginal Cost

EC120 Full Course Notes

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