ECON101 Chapter 10: Econ Chapter 10

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sangriacrow114

3 Feb 2018

School

University of Waterloo

Department

Economics

Course

ECON101

Professor

Zara Liaqat

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ECON101 Full Course Notes

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A firm is an institution that hires factors of production and organizes them to produce and sell goods and services. The fir(cid:373)"s goal: a fi(cid:396)(cid:373)"s goal is to (cid:373)a(cid:454)i(cid:373)ize p(cid:396)ofit. If the firm fails to maximize its profit, the firm is either eliminated or taken over by another firm that seeks to maximize profit. Resources bought in the market: the amount spent by a firm on resources bought in the market is an opportunity cost of production because the firm could have bought different resources to produce some other good or service. Interest forgone is the return on the funds used to acquire the capital. In addition to supplying entrepreneurship, the owner might supply labour but not take a wage. The oppo(cid:396)tu(cid:374)it(cid:455) (cid:272)ost of the o(cid:449)(cid:374)e(cid:396)"s la(cid:271)ou(cid:396) is the (cid:449)age i(cid:374)(cid:272)o(cid:373)e fo(cid:396)go(cid:374)e (cid:271)(cid:455) (cid:374)ot taki(cid:374)g the (cid:271)est alternative job. E(cid:272)o(cid:374)o(cid:373)i(cid:272) p(cid:396)ofit e(cid:395)uals a fi(cid:396)(cid:373)"s total (cid:396)e(cid:448)e(cid:374)ue (cid:373)i(cid:374)us its total oppo(cid:396)tu(cid:374)it(cid:455) (cid:272)ost of production.

Related Questions

1-7 True or False

1) In the short run, a perfectly competitive firm can earn positive, zero, or negative profit depending on the market price of the firm's output.

2)In the model of the perfectly competitive firm, the firm's fixed costs are equal to its implicit costs of production.

3)Assume the market price is greater than average total cost at the perfectly competitive firm's profit-maximizing level of output. In this case, the firm is earning positive economic profits, which act as an incentive for new firms to enter the market.

4)Assume that at the current level of output, price equals marginal revenue, but is less than average total cost. So long as price is greater than average variable cost, the firm should continue to operate in the short run to minimize its losses.

5)The fact that a firm is a price-setter does not ensure it will make a positive economic profit in the short run and over time.

6)Barriers to entry serve to limit the number of firms that operate in a particular market and, as 11) such, reduce the amount of total profit earned in the market.

7)In the prisoner's dilemma game, each player's dominant strategy is also the Nash equilibrium.

14-17 Multiple Choice

14) Marginal revenue is equal to:
A) the change in P x Q due to a one unit change in output. B) the change in quantity divided by the change in price.

C) the change in price divided by the change in output. D) price, but only if the firm is a price searcher.

15) In order to maximize its profits, a price-taking firm should produce the level of output at which:

A) marginal revenue = marginal cost. B) total revenue = total cost.

C) variable revenue = variable cost. D) average revenue = average cost.

16) Assume that there is an improvement in the technology used by firms in a perfectly competitive industry that is initially in long-run equilibrium. In the short run this would cause:

A) cannot be determined with the information given. B) no change in the firm's economic profit.
C) a decrease in the firm's economic profit. D) an increase in the firm's economic profit.

17) Assume at the firm's profit-maximizing level of output P = AVC. In this case, the firm will be:

A) incurring an economic loss. B) earning a positive economic profit.

C) earning economic profit = 0. D) breaking even.

Marginal Cost, Revenue, and Pure Competition Assignment Worksheet
Directions
This assignment deals with the recognition and application of pure competition cost and revenue information that is graphically presented. Use the graph below to answer the following questions.
Microeconomic Problem

1. How do you know that the firm represented in the graph above is a purely competitive firm?

2. To maximize profits, this firm will produce at what output level(one letter)?

3. Explain why this MR=MC position is the profit-maximizing position for any firm.

4. What is the product price (one letter)?

5. What is this firm's average revenue (one letter)?

6. At profit-maximizing output, what is this firm's average variable cost (one letter)?

7. At profit-maximizing output, what four letters indicate:

Total revenue? (Remember, four letters' a rectangle.)

Total cost?

Total variable cost?

Total fixed cost?

Total economic profit?

8. If price falls below what point, this firm will not operate in the short run? (No letter needed, just an explanation.)

9. What will happen to this firm's price, output, and economic profit in the long run? Why?

10. Where will the price settle in the long run? Remember, all purely competitive firms are theoretically doomed to make an only normal profit in the long run. (Again, no letter answer, just an explanation.)

11. Why is the long-run equilibrium position of a purely competitive firm productively and allocatively efficient?

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True/False

Indicate whether the sentence or statement is true or false.

____ 1. The average fixed cost curve increases as output increases over a relevant range of production.

____ 2. Average revenue is slightly higher than price.

____ 3. Marginal cost curves and average cost curves are both purely upward sloping.

____ 4. A firm that sells at a price below average cost is not making a normal profit.

____ 5. In the short run, it is possible for a perfectly competitive firm to make economic profits or economic losses.

____ 6. If a firm sells its output at a price greater than AC, it will earn economic profit.

____ 7. Zero profit in the economic sense means that firms are earning a normal rate of return.

____ 8. In a free market (laissez-faire) system, the price mechanism dictates the production planning (how to produce) decisions.

____ 9. Free markets produce relatively high levels of efficiency but low rates of growth.

____ 10. A natural monopoly occurs when a single firm can produce the entire output of the market at a lower average cost than could many firms.

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ECON101 Chapter 10: Econ Chapter 10

ECON101 Full Course Notes

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