question
What are characteristics of a competitive market?
answer
- Many buyers and sellers
- Similar goods
- Firms are price takers
- Free entry and exit
- Similar goods
- Firms are price takers
- Free entry and exit
question
What is the profit maximizing rule for a perfectly competitive market?
answer
Profit is maximized by choosing the level of output such as MR = MC.
question
If MR > MC a firm should?
answer
The firm should produce more.
question
If MR < MC a firm should?
answer
The firm should produce less.
question
Where does the firm maximize profit on a graph?
answer
Where the horizontal MR line meets equals the curved MC line.
question
How do we calculate profit?
answer
(Price - Average Total Cost) x Quantity = Profit
question
When does the firm make a profit/loss in the short run?
answer
They can not always make a profit, they make a profit when P > ATC.
question
What does a firm do in the short run if...
P > ATC?
ATC > P > AVC?
P < AVC?
P > ATC?
ATC > P > AVC?
P < AVC?
answer
P > ATC : Firm makes a profit
ATC > P > AVC : The firm operates to minimize loss
P < AVC : The firm will temporarily shut down
ATC > P > AVC : The firm operates to minimize loss
P < AVC : The firm will temporarily shut down
question
When does the firm make a profit/loss in the long run?
answer
They will make a profit when P > ATC
question
What does a firm do in the long run if...
P > ATC?
P < AVC?
P > ATC?
P < AVC?
answer
P > ATC : Firm makes a profit
P < ATC : The firm should shut down
P < ATC : The firm should shut down
question
When does the firm shut down in the short run and long run?
answer
When profit is below average total cost
question
How much economic profit can a firm make in the short run?
answer
Negative economic profit means a firm should continue to operate, but should shut down if price exceeds variable costs.
question
How much economic profit can a firm make in the long run?
answer
Economic profits are 0
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