Perfect vs. Imperfect Competition

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Questions and Answers

In a perfectly competitive market, what is the relationship between a firm's marginal revenue (MR) and the market price (P)?

  • MR is less than P due to the large number of competitors.
  • MR is equal to P because the firm is a price taker. (correct)
  • MR is unrelated to P in perfectly competitive markets.
  • MR is typically greater than P, reflecting the firm's ability to influence the market.

According to the provided table, which market structure has the characteristic of 'few' firms?

  • Perfect Competition
  • Oligopoly (correct)
  • Monopolistic Competition
  • Monopoly

What condition typically characterizes a firm's shutdown decision in the short run under perfect competition?

  • Price is between average variable cost (AVC) and average total cost (ATC).
  • Price is equal to average total cost (ATC).
  • Price is greater than average total cost (ATC).
  • Price is less than average variable cost (AVC). (correct)

In a perfectly competitive market, what is the shape of the demand curve faced by an individual firm?

<p>Perfectly elastic (horizontal) (B)</p>
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A firm in a perfectly competitive industry is producing at a point where its marginal cost (MC) is equal to its marginal revenue (MR). Which of the following is necessarily true at this point?

<p>The firm is maximizing its profit or minimizing its losses. (A)</p>
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How does the characteristic of product differentiation differ between perfect competition and monopolistic competition?

<p>Perfect competition involves homogeneous products, while monopolistic competition involves differentiated products. (C)</p>
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In which market structure are barriers to entry the highest?

<p>Monopoly (D)</p>
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What factor determines how much of a good the firm is willing to sell at any price point?

<p>Marginal Cost (A)</p>
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In the short run, is a perfectly competitive firm making zero profit and continuing to produce?

<p>Price is equal to Average Total Cost, Price is greater than Average Variable Cost (B)</p>
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Consider a perfectly competitive firm that is experiencing losses in the short run. Under what condition will the firm continue to produce rather than shut down?

<p>If its price is greater than its average variable cost. (B)</p>
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What are the necessary conditions for a market to be considered perfectly competitive?

<p>Many buyers and sellers, homogeneous product, no barriers to entry. (C)</p>
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If a firm in a perfectly competitive market is experiencing positive economic profits, what will happen in the long run?

<p>New firms will enter the market, increasing supply and decreasing the market price. (C)</p>
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What is the primary difference between the short-run and the long-run shutdown conditions for a firm in perfect competition?

<p>In the short run, firms shut down when P &lt; AVC, while in the long run, they shut down when P &lt; ATC. (B)</p>
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How does the ability to set prices differ in monopolistic competition compared to perfect competition?

<p>Firms in monopolistic competition have some ability to set prices, while firms in perfect competition are price takers. (D)</p>
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What is one key thing that distinguishes an oligopoly from the other market structures?

<p>The firms operating face high barriers to entry. (A)</p>
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Flashcards

Perfect Competition

Many buyers and sellers, homogenous product, no barriers to entry, and firms are price takers.

Price Takers

Firms that cannot influence the market price; they accept the market price.

MR = P in Perfect Competition

Marginal revenue equals price because firms cannot influence the market.

Profit Maximization Rule

To maximize profit or minimize losses, a firm should produce where marginal cost equals marginal revenue.

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Sunk Costs

A cost that has already been incurred and cannot be recovered.

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Short-Run Supply Curve (Perfect Competition)

The firm's supply curve is its marginal-cost curve (MC) above average variable cost (AVC).

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Short-Run Shutdown Decision

Shut down if the price is less than average variable cost.

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Long-Run Shutdown Decision

Shut down if the price is less than average total cost.

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Monopolistic Competition

Many firms, low entry barriers, differentiated products, firms are price makers

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Oligopoly

Few firms, high entry barriers, interdependent pricing, firms are price makers

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Monopoly

One firm, totally blocked entry barriers, firm is a price maker

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Study Notes

  • Chapter 14-17 provides a summary of perfect competition, monopolistic competition, oligopoly, and monopoly.

Perfect Competition (Chapter 14)

  • Many firms operate in the market.
  • Products are homogenous.
  • There are no barriers to entry.
  • Firms are price takers with no market power.
  • Marginal Revenue (MR) equals Price (P).
  • Firms maximize profit/minimize loss where Marginal Cost (MC) equals Marginal Revenue (MR).
  • MC curve is equivalent to the Supply curve.
  • Shut down decisions are made if Price is less than Average Variable Cost (P < AVC) in the short run.
  • In the long run, shut down decisions are made if Price is less than Average Total Cost (P < ATC).
  • In the short run, a competitive firm's supply curve is its marginal cost curve above average variable cost. If the price falls below average variable cost, the firm is better off shutting down.
  • Long-run economic profit is not possible.
  • No product differentiation.

Numerical Example of Profit Maximization

  • An example is used to graphically represent profit maximization for a competitive firm.
  • The firm maximizes profit by producing the quantity at which marginal cost equals marginal revenue
  • Profit is the area between price and average total cost.

Monopolistic Competition (Chapter 16)

  • Many firms operate in the market.
  • Barriers to entry are low or non-existent.
  • Firms have the ability to set prices.
  • Products are differentiated.
  • Short-run economic profit is possible.
  • Long-run economic profit is not possible.

Oligopoly (Chapter 17)

  • Few firms operate in the market.
  • Barriers to entry are high.
  • Firms have the ability to set prices.
  • There may be little to no product differentiation.
  • Short-run economic profit is possible.
  • Long-run economic profit is possible.

Monopoly (Chapter 15)

  • Only one firm operates in the market.
  • Barriers to entry are completely blocked.
  • The firm has the ability to set prices.
  • No product differentiation exists.
  • Short-run economic profit is possible.
  • Long-run economic profit is possible.

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