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Questions and Answers
Which characteristic is NOT true for firms in a perfectly competitive market?
Which characteristic is NOT true for firms in a perfectly competitive market?
What is the primary condition for a firm in a perfectly competitive market to maximize its profit?
What is the primary condition for a firm in a perfectly competitive market to maximize its profit?
What happens to a firm's total cost if it produces zero output in the short run?
What happens to a firm's total cost if it produces zero output in the short run?
Under which condition will a firm decide to shut down in the short run?
Under which condition will a firm decide to shut down in the short run?
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Why do firms in a perfectly competitive market earn zero economic profit in the long run?
Why do firms in a perfectly competitive market earn zero economic profit in the long run?
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What corresponds to a firm's short-run supply curve in a perfectly competitive market?
What corresponds to a firm's short-run supply curve in a perfectly competitive market?
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What occurs in a perfectly competitive market if there is an increase in market demand in the short run?
What occurs in a perfectly competitive market if there is an increase in market demand in the short run?
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Allocative efficiency in a perfectly competitive market is achieved when:
Allocative efficiency in a perfectly competitive market is achieved when:
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Study Notes
Perfectly Competitive Markets
- Firms can freely set prices equal to the market price.
- Goods are standardized.
- Entry and exit in the market are not restricted.
- Sellers have no influence on the market price, they are price takers.
Profit Maximization
- The profit-maximizing rule for a firm in a perfectly competitive market is to produce where marginal cost (MC) equals marginal revenue (MR).
- Alternatively, it's where MC = Price (P).
- Firms should not shut down if price (P) is greater than average total cost (ATC).
Short-Run Costs
- If a firm produces no output in the short run, its total cost equals its fixed costs.
- A firm will shut down in the short run if the price is below average variable cost (AVC).
Long-Run Equilibrium
- In the long run, firms in a perfectly competitive market earn zero economic profit.
- Free entry and exit of firms drive profits to zero.
- Price equals average total cost (ATC).
Short-Run Supply Curve
- A firm's short-run supply curve is its marginal cost curve above the minimum average variable cost.
Market Equilibrium
- If market demand increases in a short-run perfectly competitive market, price will increase, and firms will earn positive economic profits.
Allocative Efficiency
- Allocative efficiency occurs in a perfectly competitive market when firms produce where price equals marginal cost.
Example Cost Schedule
- Provided data in the document show a cost schedule for a firm.
- Data includes quantities, total costs, and prices.
- Students are asked to calculate marginal cost, determine the profit-maximizing output level, and calculate the firm's profit.
Shutdown Decision
- Example situation provided in the document with market price, average variable cost, fixed cost, and quantity.
- Students are asked to calculate total revenue, total cost, and profit for the firm and determine whether the firm should shut down.
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Description
Test your knowledge on perfectly competitive markets, including firm behavior, profit maximization, and cost structures. This quiz covers key concepts such as marginal cost, average total cost, and long-run equilibrium. Perfect for students studying microeconomics.
