ecn 101 final exam - chapter 14 - Custom Scholars
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ecn 101 final exam – chapter 14

question
characteristics of perfect competition
answer
- many buyers and sellers
- all firms sell the same quality of good
- no barriers to entry or exit
- equal information across firms
question
why are firms referred to as "price takers"?
answer
because the individual firm cannot influence the price of the good it produces
question
marginal revenue
answer
- revenue from an additional unit sold
- ∆total revenue/∆quantity = price
question
total revenue
answer
- revenue from total sales
- price x quantity
question
average revenue
answer
- revenue per unit
- total revenue/quantity = price
question
marginal revenue and marginal cost
answer
- if marginal revenue > marginal cost, the firm should increase its output
- if marginal revenue < marginal cost, the firm should decrease its output
question
profit-maximizing rule
answer
produce quantity when marginal revenue = marginal cost (aka where P=MC)
question
firm's short run profit maximizing decision
answer
- must decide whether to produce or shutdown temporarily
- if producing, firm must decide what the profit maximizing quantity is
question
firm's long run profit maximizing decision
answer
- must decide whether to increase or decrease size of plant/factory
- must decide whether to enter or exit (leave permanently) the industry
question
a portion of the marginal cost curve...
answer
is also the firm's supply curve (portion above minimum average variable cost)
question
shutdown decision
answer
a temporary decision to not produce in the short run
- sometimes firms choose not to shut down if the loss that will be incurred from continuing to produce is less than the fixed cost
question
when will a firm shut down?
answer
- when P < AVC
- loss = fixed cost
question
when will a firm produce
answer
when P > AVC
- quantity > 0
question
when do new firms enter the market?
answer
- when market conditions are profitable (P>ATC)
question
what goes away in the long run?
answer
- average variable cost
- it only matters to determine if the firm should produce or not (if the firm doesn't produce in the SR, it will exit in the long run)
question
when do existing firms leave (exit) industry?
answer
- when market conditions are unprofitable (P<ATC)
question
when do firms produce?
answer
when price is greater than or equal to ATC
question
if market conditions remain profitable, then overtime...
answer
- profits will attract new firms into the market
- MARKET SUPPLY SHIFTS RIGHT AND THE EQUILIBRIUM PRICE FALLS
- adjustments continue until all profits are squeezed out of the market
question
if market conditions remain unprofitable, then overtime...
answer
- existing firms will exit the market
- MARKET SUPPLY SHIFTS LEFT AND EQUILIBRIUM PRICE RISES
- adjustments continue until all losses are eliminated
question
what is long run competitive equilibrium?
answer
- a point of zero economic profit where P = ATC
- all the economic costs of producing (implicit and explicit) are covered, including the opportunity cost of the business owner's time
- there is no incentive for new firms to enter and no reason for existing firms to leave
question
what will happen if changes occur following a long-run competitive equilibrium?
answer
- change examples: market demand changes, firms discover new cost saving tech
- market adjustments will occur until the market has returned to long run equilibrium
question
supply in the long run is...
answer
perfectly elasitc
question
demand is perfectly elastic...
answer
in a perfectly competitive market
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question
characteristics of perfect competition
answer
- many buyers and sellers
- all firms sell the same quality of good
- no barriers to entry or exit
- equal information across firms
question
why are firms referred to as "price takers"?
answer
because the individual firm cannot influence the price of the good it produces
question
marginal revenue
answer
- revenue from an additional unit sold
- ∆total revenue/∆quantity = price
question
total revenue
answer
- revenue from total sales
- price x quantity
question
average revenue
answer
- revenue per unit
- total revenue/quantity = price
question
marginal revenue and marginal cost
answer
- if marginal revenue > marginal cost, the firm should increase its output
- if marginal revenue < marginal cost, the firm should decrease its output
question
profit-maximizing rule
answer
produce quantity when marginal revenue = marginal cost (aka where P=MC)
question
firm's short run profit maximizing decision
answer
- must decide whether to produce or shutdown temporarily
- if producing, firm must decide what the profit maximizing quantity is
question
firm's long run profit maximizing decision
answer
- must decide whether to increase or decrease size of plant/factory
- must decide whether to enter or exit (leave permanently) the industry
question
a portion of the marginal cost curve...
answer
is also the firm's supply curve (portion above minimum average variable cost)
question
shutdown decision
answer
a temporary decision to not produce in the short run
- sometimes firms choose not to shut down if the loss that will be incurred from continuing to produce is less than the fixed cost
question
when will a firm shut down?
answer
- when P < AVC
- loss = fixed cost
question
when will a firm produce
answer
when P > AVC
- quantity > 0
question
when do new firms enter the market?
answer
- when market conditions are profitable (P>ATC)
question
what goes away in the long run?
answer
- average variable cost
- it only matters to determine if the firm should produce or not (if the firm doesn't produce in the SR, it will exit in the long run)
question
when do existing firms leave (exit) industry?
answer
- when market conditions are unprofitable (P<ATC)
question
when do firms produce?
answer
when price is greater than or equal to ATC
question
if market conditions remain profitable, then overtime...
answer
- profits will attract new firms into the market
- MARKET SUPPLY SHIFTS RIGHT AND THE EQUILIBRIUM PRICE FALLS
- adjustments continue until all profits are squeezed out of the market
question
if market conditions remain unprofitable, then overtime...
answer
- existing firms will exit the market
- MARKET SUPPLY SHIFTS LEFT AND EQUILIBRIUM PRICE RISES
- adjustments continue until all losses are eliminated
question
what is long run competitive equilibrium?
answer
- a point of zero economic profit where P = ATC
- all the economic costs of producing (implicit and explicit) are covered, including the opportunity cost of the business owner's time
- there is no incentive for new firms to enter and no reason for existing firms to leave
question
what will happen if changes occur following a long-run competitive equilibrium?
answer
- change examples: market demand changes, firms discover new cost saving tech
- market adjustments will occur until the market has returned to long run equilibrium
question
supply in the long run is...
answer
perfectly elasitc
question
demand is perfectly elastic...
answer
in a perfectly competitive market
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