Economics: Perfectly Competitive Model

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Questions and Answers

Which industry most closely approximates the perfectly competitive model?

Cigarette

Automobile

Wheat farming (correct)

Newspaper

How is the price of a commodity determined in the market period given its supply?

Market demand curve alone

Market supply curve alone

Market demand curve and market supply curve (correct)

None of the above

At what point are total profits maximized for a firm?

TR equals TC

TR curve and TC curve are parallel and TC exceeds TR

TR curve and TC curve are parallel and TR exceeds TC (correct)

TR curve and TC curve are parallel

What defines the optimum level of output for a perfectly competitive firm?

MR equals MC Signup and view all the answers

At what condition does a firm's shutdown point occur?

All of the above Signup and view all the answers

In long-run equilibrium for a perfectly competitive firm, what holds true?

All of the above Signup and view all the answers

When the demand curve is elastic, what can be said about MR?

MR is positive Signup and view all the answers

For a pure monopolist, what defines the optimal level of output?

TR is maximum Signup and view all the answers

What is likely to happen to a monopolist incurring losses in the short run in the long run?

Any of the above is possible. Signup and view all the answers

Which statement about equilibrium in monopolist firms is correct?

Long run equilibrium may not coincide with short run equilibrium. Signup and view all the answers

Why can a monopolist achieve pure profits in the long run?

Because of blocked entry into the market. Signup and view all the answers

What effect does imposing a maximum price at the intersection of the monopolist’s SMC and demand curves have?

The outcome can vary and may fall under any of the above. Signup and view all the answers

Which consequence results from the imposition of a per unit tax on a monopolist?

Both SAC and SMC curves shift up as the tax is similar to a variable cost. Signup and view all the answers

Which form of monopoly regulation is potentially the most beneficial for consumers?

Implementing price controls to cap prices. Signup and view all the answers

In a perfectly competitive market, a firm faces a price of $80 and has the cost function C(Q) = 40 + 8Q + 2Q^2. What is the most appropriate output level for the firm in the short run?

10 units to maximize profit. Signup and view all the answers

When operating under monopoly conditions, what would be a significant consequence of a firm's cost function C(qi) = 100 + 50qi - 4qi^2 + qi^3?

Identifying the supply function would be complex. Signup and view all the answers

Study Notes

Perfectly Competitive Model

Industries most similar to a perfectly competitive model include wheat farming.
Price in a market period is determined by both supply and demand curves.

Total Profit Maximization

Total profits are maximized when the total revenue (TR) curve is above the total cost (TC) curve and they are parallel.

Optimum Output for a Perfectly Competitive Firm

The optimum output level occurs where marginal revenue (MR) equals marginal cost (MC), and MC is rising.

Shutdown Point

The shutdown point is where price (P) equals average variable cost (AVC).
This means total losses equal total fixed costs (TFC).
At this point, the firm will shut down if price falls below AVC.

Short-Run Supply Curve

The short-run supply curve for a perfectly competitive firm is the portion of the marginal cost (MC) curve above the shut-down point.
It's the rising portion of MC above the minimum of AVC.

Long-Run Equilibrium

In the long run equilibrium of a perfectly competitive firm and industry, price (P) equals marginal revenue (MR), marginal short-run cost (SMC) and long-run cost (LMC), and the lowest point on the long-run average cost (LAC) curve.

Demand Curve and MR

When the demand curve (is elastic) the marginal revenue will be positive.

Pure Monopolist Equilibrium

The optimum output level for a pure monopolist occurs where marginal revenue (MR) equals marginal short-term cost (SMC).
In the best case, price (P) equals SMC.
A monopolist might break even, make a profit, or incur losses in the short term.

Long-Run Monopolist Behavior

If monopolists incur a loss in the short run, in the long run, they might exit the market or stay in and seek to break even.

Monopoly Regulations

Price control, lump-sum tax, and per-unit tax are forms of monopoly regulation. Consumers will likely benefit from price control.

Perfectly Competitive Firm Output

A firm in a perfectly competitive market should produce the quantity where the market price ($80) equals marginal cost (MC) in the short run.
This should generate the supply function for the firm.
The firm's profit will be dictated by its price and cost functions in the long run.
Long-run adjustments are usually dictated by new entrants and exits of firms in the market; supply and demand will adjust in the long run.

Firm Cost Functions and Supply

A firm's cost function in terms of quantity produced (qi) defines production costs.
A short-run supply function is influenced by a firm's cost function, and perfect competition vs monopoly factors.

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Description

This quiz explores the key concepts of perfectly competitive markets, focusing on aspects like profit maximization, optimum output, shutdown points, and supply curves. Test your understanding of how price is determined and the conditions for long-run equilibrium in such markets.