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ARE 201 - Chapter 14 Final Exam
Terms in this set (13)
Characteristics of a competitive Market?
-Many buyers and sellers
-The product sold is identical in the eyes of the consumer
-Firms can freely enter or exit this market (no barriers to entry)
Since competitive firms are price takers, each additional unit of output can be sold
at market price. This implies:
- Slope of total revenue = MR = P
A firm's profit-maximizing quantity of output, Q∗
, occurs where:
- MC = MR = P
- slope of TC function = slope of TR function
- Marginal profit = (MR − MC) = 0
If MR > MC should a firm increase or decrease output?
-The additional revenue from another unit exceeds the additional costs from another unit (marginal profit is positive)
-Increasing Q will increase profit
If MR < MC should a firm increase or decrease output?
-The additional revenue from another unit is less than the additional cost from another unit (marginal profit is negative)
-Increasing Q will decrease profit
Determine Q∗ if given a table of total costs and a market price (see exercise).
What is a firm's breakeven price?
- Profit = TR − TC = (P − AT C) ∗ Q
- Breakeven price is where profit = 0.
- Thus, breakeven price is minimum ATC (or intersection of ATC and MC)
How much profit does a competitive firm earn in the long run?
- If price is above minimum ATC, the firms are earning short-run profit
- If price is below minimum ATC, firms are earning short-run losses
- In the long-run, price is equal to minimum ATC =⇒ profit = 0 in the long run!
What is a competitive firm's supply curve?
Since P = MC is true at profit-maximizing output, MC is firm's supply curve!
Can you determine a market supply curve if given a marginal cost curve and given
that all firms are identical?
(see chapter 14 in-class exercise)
From a graph of average and marginal cost curves, can you determine:
- competitive firm's profit-maximizing level of output.
- competitive firm's profit.
- total fixed cost (hint: use ATC, AVC, and Q)
Under what conditions should a competitive firm shut down in the short-run?
- P < minAVC
- multiplying both sides by Q =⇒ T R < V C
- The above two conditions are equivalent.
Solve for profit maximizing quantity if given market price and marginal cost function.
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