What conditions make a market perfectly competitive?
answer
A market is perfectly competitive if
it has many buyers and many sellers, all of whom are selling identical products, with no barriers to new firms entering the market.
question
How should firms in perfectly competitive markets decide how much to produce?
answer
Perfectly competitive firms should produce the quantity where the difference between total revenue and total cost is as large as possible.
question
Which of the following is an expression of profit for a perfectly competitive firm?
answer
Profit for a perfectly competitive firm can be expressed as
Profitequals=left parenthesis (P×Q)−(ATC×Q), where P is price, Q is output, and ATC is average total cost.
question
The figure to the right represents the cost structure for a perfectly competitive firm with its average total cost (ATC) curve, average variable (AVC) curve, and marginal cost (MC) curve. Fixed costs are $50.00.
Suppose the market price is $24.00 per unit.
Characterize the firm's profit.
If the firm produces ourput, then it will
answer
experience losses
question
Should the firm instead shut down in the short run?
answer
In the short run, the firm should continue to produce because price is greater than average variable cost.
question
What is the supply curve for a perfectly competitive firm in the short run?
answer
The supply curve for a firm in a perfectly competitive market in the short run is
that firm's marginal cost curve for prices at or above average variable cost.
question
Suppose the market for cotton is perfectly competitive and that input prices decrease as the industry expands. Characterize the industry's long-run supply curve.
answer
The cotton industry's long-run supply curve will be downward sloping because the long-run average cost of production will be decreasing.
question
Does the market system result in allocative efficiency?
answer
In the long run, perfect competition
results in allocative efficiency because firms produce where price equals marginal cost.
question
Assume the market for oranges is perfectly competitive. If the demand for oranges increases, will the market supply additional oranges?
answer
If the demand for oranges increases, then the market
will supply additional oranges because producers seek the highest return on their investments.
question
Does the market system result in productive efficiency?
answer
In the long run, perfect competition results in productive efficiency because firms enter and exit until they break even where price equals minimum average cost.
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