Microeconomics: Normal Profit for a Purely Competitive Firm

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Questions and Answers

Under what condition will a purely competitive firm break even?

When P = ATC (correct)
When MR = AVC
When AFC = AVC
When MR = MC

What is the condition for a firm to continue producing in the short run?

MR > AVC (correct)
MR > ATC
MR < ATC
MR = AFC

What is the profit maximizing condition for a purely competitive firm?

MR = ATC
MR = MC (correct)
MR < MC
MR > MC

When will a firm shut down in the short run?

When P < AVC (B) Signup and view all the answers

What is the shutdown point of a firm?

Where AVC is at its minimum (A) Signup and view all the answers

What is an economic loss in the context of a firm?

When P < ATC (C) Signup and view all the answers

When will a firm minimize its loss?

When MR > AVC (C) Signup and view all the answers

What is the condition for a firm to incur an economic loss?

When P < ATC (B) Signup and view all the answers

What is a characteristic of a purely competitive market?

There are a very large number of sellers. (D) Signup and view all the answers

What is the demand curve of a firm in a purely competitive market?

Horizontal (B) Signup and view all the answers

What is the formula for average revenue?

AR = TR / Q (D) Signup and view all the answers

What is the marginal revenue of a firm in a purely competitive market?

The change in total revenue divided by the change in quantity (C) Signup and view all the answers

How does a firm in a purely competitive market determine its profit-maximizing level of output?

By producing where total revenue equals total cost (D) Signup and view all the answers

What is a characteristic of the total revenue formula in a purely competitive market?

TR = P × Q (B) Signup and view all the answers

What is the break-even point for a firm in a purely competitive market?

Where total revenue equals total cost (B) Signup and view all the answers

What is the goal of a firm in a purely competitive market?

To maximize its profit (D) Signup and view all the answers

What is the concept illustrated in the table above?

Short-run competitive equilibrium (C) Signup and view all the answers

What is an assumption of profit maximization in the long run?

All firms in the industry have identical costs (D) Signup and view all the answers

What is the fallacy of composition?

The idea that what is true for the part must also be true for the whole (A) Signup and view all the answers

What is the goal of the firm in profit maximization?

To make profits and avoid losses (A) Signup and view all the answers

What is a characteristic of a constant-cost industry?

Entry and exit of firms doesn't affect resource prices (A) Signup and view all the answers

What is a consequence of the fallacy of composition?

The collective effort of individuals does not guarantee success for the whole (B) Signup and view all the answers

What is an assumption of short-run competitive equilibrium?

Easy entry and exit of firms (A) Signup and view all the answers

What is a key difference between the short run and the long run?

The ease of entry and exit of firms (C) Signup and view all the answers

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!