Pure Competition

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CHAPTER 23
Pure Competition

A. Short-Answer, Essays, and Problems

1.How does pure competition differ from other basic market models?

2.What are some examples of the four different market structures?

3.What are four characteristics of pure competition?

4.How would you describe the demand curve for the purely competitive firm? For the industry?

5.What is the difference between average, total, and marginal revenue? What is the shape of the total and marginal revenue curves for the individual competitive firm?

6.Why does price equal marginal revenue for the purely competitive firm? What is the relationship to the demand curve for the firm?

7.Below is a demand schedule facing an individual firm. Complete the table by computing average revenue, total revenue, and marginal revenue. Then answer the following two questions: (a) How can you tell whether a firm is operating in a market that is purely competitive? (b) What relationship exists between average revenue and marginal revenue?

QuantityAverageTotalMarginal
Pricedemandedrevenuerevenue    revenue  
$300$_____$_____–––
301__________$_____
302_______________
303_______________
304_______________
305_______________
306_______________

8.Explain the marginal revenue and marginal cost approach to profit maximization and use it to describe profit, loss, and shut down situations for the purely competitive firm.

9.What conditions are necessary to determine if the purely competitive firm should produce in the short run? State the marginal revenue and marginal cost conditions and the total revenue and total cost conditions.

10.What quantity should the purely competitive firm produce to maximize profits? Analyze from a total revenue and total cost perspective and a marginal revenue and marginal cost perspective.

11.Under what conditions will a purely competitive firm realize an economic profit? Give a response from a marginal revenue and marginal cost perspective and from a total revenue and total cost perspective.

12.Why is the level of output at which marginal revenue equals marginal cost the profit-maximizing output?

13.Suppose a bridge for automobiles was constructed across a river and all the costs associated with its construction have been paid. The amount of traffic is such that there are no foreseeable problems of overcrowding in the use of the bridge. Assume, also, that the extra cost associated with traffic crossing the bridge is for all practical purposes equal to zero. What toll should be charged to achieve the most efficient use of the bridge?

14.An airline is flying between two cities. The airline has the following costs associated with the flight:

Crew$4,000Plane daily depreciation$2,000
Fuel1,000Plane daily insurance2,000
Landing fee1,000

The airline has an average of 40 passengers paying an average of $200 for this flight. Do you think the airline should be flying between the two cities? Evaluate from a short-run and long-run perspective.

15.What is the relationship between marginal cost and the supply curve for the purely competitive firm?

16.Draw a graph of the short-run cost curves for a purely competitive firm that shows a short-run supply curve for the individual firm. Identify the shutdown point, the break-even point, the profit-maximizing point, and the levels of output associated with those points.

17.How will the marginal and average cost curves of the typical pure competitor shift or change as a result of the following events: (a) an increase in wages of all labor; (b) an increase in the rental payments on office machinery; (c) a technological...
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