Chapter 10&11

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The demand seen by a purely competitive firm is perfectly elastic—horizontal on a graph—at the market price. T o F


Marginal revenue and average revenue for a purely competitive firm coincide with the firm’s demand curve; total revenue rises by the product price for each additional unit sold. T o F


A firm will choose to produce if it can at least break even and generate a normal profit.T o F


Profit is maximized, or loss minimized, at the output at which marginal revenue (or price in pure competition) equals marginal cost, provided that price exceeds variable cost.


If the market price is below the minimum average variable cost, the firm will minimize its losses by shutting down.


A competitive firm’s short-run supply curve is the portion of its marginal cost (MC) curve that lies above its average variable cost (AVC) curve.


If price P is greater than minimum average variable cost, the firm will produce the amount of output where MR (= P) = MC in order to either maximize its profit (if price exceeds minimum ATC) or minimize its loss (if price lies between minimum AVC and minimum ATC).


Market supply in a competitive industry is the horizontal sum of the individual supply curves of all of the firms in the industry. The market equilibrium price is determined by where the industry’s market supply curve intersects the industry’s market demand curve.


In pure competition, entrepreneurs remove resources from industries and firms that are generating economic losses in order to transfer them to industries and firms that are generating economic profits.


In the long run, the entry of firms into an industry will compete away any economic profits, and the exit of firms will eliminate economic losses, so price and minimum average total cost are equal. Entry and exit cease when the firms in the industry return to making a normal profit (zero economic profit).


The long-run supply curves of constant-, increasing-, and decreasing-cost industries are horizontal, upsloping, and downsloping, respectively.


A firm finds that at its MR = MC output, its TC = $1,000, TVC = $800, TFC = $200, and total revenue is $900. This firm should:

produce because the resulting loss is less than its TFC.

Which of the following statements applies to a purely competitive producer?

It will not advertise its product.

Price is constant to the individual firm selling in a purely competitive market because:

each seller supplies a negligible fraction of total supply.

A competitive firm in the short run can determine the profit-maximizing (or loss-minimizing) output by equating:

marginal revenue and marginal cost.

When a firm is maximizing profit, it will necessarily be:

maximizing the difference between total revenue and total cost.

Which of the following statements is correct?

Economic profits induce firms to enter an industry; losses encourage firms to leave.

An increasing-cost industry is associated with:

an upsloping long-run supply curve.

The MR = MC rule applies:

in both the short run and the long run.

Creative destruction is least beneficial to:

workers in the "destroyed" industries

If a purely competitive firm is producing at the MR = MC output level and earning an economic profit, then:

new firms will enter this market.

Long-run competitive equilibrium:

esults in zero economic profits.

Economists use the term imperfect competition to describe:

those markets that are not purely competitive.

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