Questions and Answers
Under what condition will a purely competitive firm break even?
What is the condition for a firm to continue producing in the short run?
What is the profit maximizing condition for a purely competitive firm?
When will a firm shut down in the short run?
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What is the shutdown point of a firm?
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What is an economic loss in the context of a firm?
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When will a firm minimize its loss?
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What is the condition for a firm to incur an economic loss?
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What is a characteristic of a purely competitive market?
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What is the demand curve of a firm in a purely competitive market?
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What is the formula for average revenue?
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What is the marginal revenue of a firm in a purely competitive market?
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How does a firm in a purely competitive market determine its profit-maximizing level of output?
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What is a characteristic of the total revenue formula in a purely competitive market?
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What is the break-even point for a firm in a purely competitive market?
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What is the goal of a firm in a purely competitive market?
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What is the concept illustrated in the table above?
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What is an assumption of profit maximization in the long run?
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What is the fallacy of composition?
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What is the goal of the firm in profit maximization?
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What is a characteristic of a constant-cost industry?
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What is a consequence of the fallacy of composition?
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What is an assumption of short-run competitive equilibrium?
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What is a key difference between the short run and the long run?
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Study Notes
Profit Maximization in a Purely Competitive Firm
- Profit maximization occurs when MR = MC
- Break-even point or normal profit occurs when P = ATC
Loss Minimization
- Economic loss occurs when P < ATC
- A firm will still produce if MR > minimum AVC to minimize losses
Short-run Shutdown Case
- A firm shuts down in the short run if P < AVC
- A firm's shutdown point is where AVC is at its minimum
Characteristics of Pure Competition
- Very large numbers of sellers
- Standardized or identical product
- Price takers (no pricing power)
- Free entry and exit
Purely Competitive Demand
- Perfectly elastic demand
- Firm produces as much or little as they wish at the market price
- Demand graph is a horizontal line
Average, Total, and Marginal Revenue Formulas
- Average revenue (AR) = TR/Q = P
- Total revenue (TR) = P × Q
- Marginal revenue (MR) = ΔTR/ΔQ
Profit Maximization: TR – TC Approach
- A competitive producer will produce at the output level where TR > TC by the greatest amount
- Alternatively, produce at the break-even point or normal profit (P = ATC)
Short-run Competitive Equilibrium
- No additional information provided
Firm versus Industry
- Fallacy of composition: false idea that what is true for a part must also be true for the whole
- Example: individual students studying hard does not guarantee the entire class will perform well on an exam
Profit Maximization in the Long Run: Assumptions
- All firms in the industry have identical costs
- The goal of the firm is to make profits and avoid losses
- Easy entry and exit of firms
- Entry and exit of firms does not affect resource prices used in the industry (constant-cost industry)
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Description
This quiz covers the concept of short-run normal profit for a purely competitive firm, including profit maximization and break-even points. Test your understanding of microeconomic principles!