Chapter 8 Pure Competition

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An oligopoly has ____ sellers and must consider the decisions of its rivals in determining its own ____ and output
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few; price
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Economists group industries into ____ distinct market structures
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four (pure competition, pure monopoly, monopolistic competition, and oligopoly)
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Product ____ distinguishes ____ competition from all other market structures.
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differentiation; monopolistic
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In pure competition, a firm’s economic profit is equal to:
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marginal revenue minus average total cost multiplied by quantity price minus average total cost multiplied by quantity
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From an economic standpoint, the break-even point is the level of output at which a firm makes ____ profit
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a zero; a normal
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____ competition is considered to be rare in the real world
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pure
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A firm operating in a purely competitive market is a price taker because it:
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cannot change market price, it can only adjust to it
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Match each market structure with the correct number of firms that dominate its industry few ____ pure competition one ____ oligopoly very large number ____ monopoly large number ____ monopolistic competition
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few ____ oligopoly very large number ____ pure competition one ____ monopoly large number (many) ____ monopolistic competition
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In a purely competition market, price per unit to the purchaser is synonymous with ____ per unit or ____ revenue to a seller
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revenue; marginal
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in this graph, the first unit of output sold increases total revenue from zero to $131. the second unit sold increases total revenue form $131 to $262 and marginal revenue is again $131. the third unit sold increases total revenue to ____ and marginal revenue is now ____
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$393 and $131 put them all on the table (fig. 8.1 p. 166)
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The MR = MC rule is know as the:
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loss-minimizing rule profit-maximizing rule
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Which of the following best describes marginal revenue
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the additional or extra revenue that an additional or extra unit of output contributes to total revenue
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Which of the following are true about the profit-maximizing rule of MR = MC
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the rule can be re-stated as P=MC when applied to a purely competitive firm because product price and MR are equal the rule is an accurate guide to profit maximization for all firms regardless of their market structure When MR is equal to MC at a fractional level of output the last complete unit of output should be produced where MR > MC The rule applies only if producing is referable to shutting down
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If price is ____ to the firm’s minimum average ____ cost, the firm will cover its ____ variable cost and its loss will equal only its total ____ cost
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equal; variable; total; fixed
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The price at which the firm will break-even or where it earns a normal profit, but not an economic profit is
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P4 where MC intercept ATC
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at which price will a firm shut down
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P1 where MC lower than AVC
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The marginal cost curve is the firm’s short-run ____ curve
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supply
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Which of the following factors will alter costs and shift the marginal cost or short-run supply curve to a new location
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Technology Price of variable inputs
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A _____ competitive firm’s average-revenue schedule is also known as its demand schedule.
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perfectly
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A firm’s price multiplied by the quantity of output or goods produced equal
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total revenue
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A wage increase would increase marginal costs and shift the supply curve
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upward; to the left
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in a perfectly competitive market, the demand curve for an individual firm is perfectly _____ at the market price
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elastic
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Which of the following describes the purely competitive industry’s supply curve
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it is the sum of the supply curves of all the firms in the industry and has an important bearing on price
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A purely competitive firm is a price _____
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taker
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Confronted with the market price of its product, a purely competitive producer will ask which three questions
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What economic profit or loss will we realize if we produce this product If we produce this product, in what amount Should we produce this product
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True or false: Because of the law of diminishing returns, marginal costs eventually fall as more units of output are produced.
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false
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Which of the following are all true statements about perfectly competitive firms
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. Quantity supplied increases in direct response to an increase in product price and desire to maximize profit . Because marginal costs rise with increased output, a purely competitive firm must get higher prices to motivate it to produce more output . At greater levels of output. the higher marginal costs equal the product price and marginal revenue and profit is maximized
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The quantity of a product supplied by a firm in pure competition should _____ as long as price rises
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increase
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There are two ways to determine the level of output at which a firm will realize maximum economic _____ or minimum economic _____
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profit; losses
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True or false: a pure monopoly involves a very large number of firms producing a single unique product
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false a pure monopoly involves one firm or seller producing a single unique product
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The market demand curve for a purely competitive industry:
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slopes downward this question refers to the market demand curve, not the individual demand curve for a purely competitive firm
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Within pure competition, an individual firm would not be able to affect _____ in that industry by simply changing its output
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price
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in the short run, the firm has a _____ plant and therefore, can adjust its output only through changes in the amount of ______ resources it uses.
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fixed; variable
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True or false: A purely competitive firm in the short run will maximize profit by producing up to the point where marginal revenue is equal to marginal cost if the market price is less than minimum average variable cost
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false A purely competitive firm will maximize profit by producing up the point where marginal revenue is equal to marginal cost if the market price exceeds the minimum average cost
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A firm should stop producing if its average _____ cost is _____ price
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variable; greater than
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At a profit-maximizing level of output of 25 units, a perfectly competitive firm’s marginal revenue is $4, average variable cost is $.30, average total cost is $1.22 and marginal cost is $3.75 this firm’s economic profit equal
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$69.50
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True or false: A firm within pure competition will maximize its profits when total cost is maximized over total revenue
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false A firm with pure competition will maximize its profit when total revenue is maximized over total cost
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Which of the following best describes a pure monopoly
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One firm selling a single unique product, where entry of additional firm is blocked and product differentiation is not an issue
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The profit-maximizing case, as illustrated in the table, shows which of the following
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. The tenth unit should not be produced as it adds more to marginal cost ($150) than to revenue ($131) . Every unit of output up to and including the ninth unit represents greater marginal revenue than marginal cost. . Each of the first nine units adds to the firm’s profit and should be pruduced
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Since firms within pure competition are _____ all or a majority of firms within an industry must agree to change output in order to affect price
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price takers
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In the short run, purely competitive firm will maximize profit by producing up the point where marginal revenue is equal to marginal cost if
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market price exceeds average variable cost.
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in a purely competitive industry at profit maximization marginal _____ is equal to _____
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. revenue; marginal cost . cost; price . revenue; price (MR=MC and MR=P, therefore, MC = P
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which of the following best describes pure competition
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An industry involving a very large number of firms producing identical products and in which new firm can enter or exit the industry very easily
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When price is above ______ total cost, the firm incurs and economic profit
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average recall the formula for profit or losses that states profit/loss = (price – ATC) x quantity. only when price is greater or above ATC can there be a profit
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A purely competitive firm can maximize its economic profit (or minimize its loss) only by adjusting its
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supply
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Which of the following explains why the rate of increase in total costs varies with the relative efficiency of the firm
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total costs increase at a decreasing rate as the firm uses its fixed resources more efficiently, but start to rise because of diminishing returns
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Karen runs a print shop that makes posters for large companies. It is a very competitive business. The market price is currently $1.00 per poster. She has fixed cost of $500. Her variable costs are $1,000 for the first thousand poster, $800 for second thousand posters, and then $750 for each additional thousand posters
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What is her ATC per poster if she prints 1000 500 + 1000 / 1000 = 1.50 What is her ATC per poster if she prints 2000 500 + 1000 + 800 / 2000 = 1.15 What is her ATC per poster if she prints 10,000 500 + 1000 + 800 + (750 * 8) / 10,000 = .83 if the market price fell to 0.70 cents per poster, would there be any output level at which Karen would not shut down production immediately? NO

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