Managerial Economics Chapter 9

Topics: Economics, Perfect competition, Microeconomics Pages: 5 (1632 words) Published: February 16, 2014
CHAPTER 9

Three conditions for a market to be perfectly competitive?
Many buyers and sellers, with all firms selling identical products, and no barriers to new firms entering the market. In perfectly competitive markets, prices are determined by
The interaction of market demand and supply because firms and consumers are price takers. Price taker
Buyer or seller that is unable to affect the market price.
A buyer or seller that takes the market price as given
When are firms likely to be price takers?
A firm is likely to be a price taker when….. it sells a product that is exactly the same as every other firm. It represents a small fraction of the total market. Consumers are usually price takers when they buy most goods and services because ____, while relatively few firms are price takers because ____. Their individual purchases are small relative to the market; their individual output is large relative to the market. Explain why it is true that for a firm in a perfectly competitive market that P=MR=AR In a perfectly competitive market, P=MR=AR because

Firms can sell as much output as they want at the market price. Which of the following statement is true when the difference between TR and TC is at its maximum positive value? MR=MC AND Slope of TR= Slope of TC

When maximizing profits, MR = MC is equivalent to P = MC because The marginal revenue curve for a perfectly competitive firm is the same as its demand curve. Perfectly competitive firms should produce the quantity where The difference between total revenue and total cost is as large as possible. Profit for a perfectly competitive firm can be expressed as (P-ATC) x Q , where P is price, Q is output, and ATC is average total cost. A student argues: “To maximize profit, a firm should produce the quantity where the difference between marginal revenue and marginal cost is the greatest. If a firm produces more than this quantity, then the profit made on each additional unit will be falling.” False. Profit is maximized at the output level where marginal revenue equals marginal cost. Which of the following best explains why firms don’t maximize revenue rather than profit? At the point where revenue is maximized, the difference between total revenue and total cost may not be maximized. If a firm decided to maximize revenue, would it be likely to produce a smaller or larger quantity than if it were maximizing profit? The firm would produce a larger quantity of output. What is the difference between a firm’s shutdown point in the short run and its exit point in the long run? In the short run, a firm’s shutdown point is the minimum point on the Average variable cost curve, while in the long run, a firm’s exit point is the minimum point on the average total cost curve. Why are firms willing to accept losses in the short run but not in the long run? There are fixed costs in the short run but not in the long run. There are sunk costs in the short run but not in the long run. What is the relationship between a perfectly competitive firm’s marginal cost curve and its supply curve? A firms marginal cost curve is equal to its supply curve for prices above average variable cost. The market supply curve is derived

By horizontally adding the individual firms’ supply curves. When are firms likely to enter an industry? When are they likely to exit.? - Economic profits attract firms to enter an industry, and economic losses cause firms to exit an industry. Would a firm earning zero economic profit continue to produce, even in the long run? In the long-run competitive equilibrium, a firm earning zero economic profit Will continue to produce because such profit corresponds with positive accounting profit. When new firms enter into an industry

Total supply in the industry increases leading to a reduction in price and economic profit of the existing firms. When firms exit from an industry
Total industry supply decreases which increases industry price and economic...
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