ECON 101 Lecture Notes - Lecture 16: Average Variable Cost, Demand Curve, Perfect Competition

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30 Apr 2019

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Recap: a firm in a perfectly competitive market will take the price as determined by the market. The firm compares that price to its marginal costs to determine its optimal individual output, q* The firm must also consider the comparison of the market price to its average variable costs associated with producing that level of output, q* The firm remains in the market if p >avc and will shut down (produce q=0) if p < avc. The firms break-even" price occurs where the market price equals its minimum average total cost. The firm"s shutdown" price occurs where the market price equals its minimum average variable cost. Recap: if a firm produces a quantity where: P > atc the firm is profitable. P = atc the firm breaks event. P < atc the firm incurs a loss. Recap: in the long run in a perfectly competitive industry:

Related Questions

6. Power Printers Total Costs (per hour)

q TC

0 65

1 80

2 95

3 120

4 150

5 200

If the price of a printer is $50 in this perfectly competitive industry, what is the profit-maximizing rate of output?

7. Which of the following is NOT true in a perfectly competitive market?

a. There is free entry and exit into the industry.

b. Each firm produces a differentiated product.

c. Each firm faces a perfectly elastic demand curve.

d. Price is equal to marginal revenue at every output level for the firm.

8. A perfectly competitive firm should always continue to operate in the short run as long as:

a. P < ATC at the rate of output where MR = MC.

b. P < AVC at the rate of output where MR = MC.

c. MR > AVC at the rate of output where MR = MC.

d. MR > AFC at the rate of output where MR = MC.

9. A firm that makes zero economic profits:

a. Must eventually go bankrupt.

b. Should shut down.

c. Incurs a loss, but should not shut down.

d. Covers all its costs, including a provision for normal profit.

10. A monopoly firm is different from a competitive firm in that:

A. There are many substitutes for the monopolistâs product whereas the competitive firmâs demand curve is perfectly elastic.

B. The monopolistâs demand curve is perfectly inelastic, whereas the competitive firmâs demand curve is perfectly elastic.

C. The monopolist can influence the price in the market, whereas the competitive firm is a price taker.

D. All of the above

taupewombat30

a. Your firm is producing a good in a perfectly competitive market. If you know that when you produce 25 units per day, your total costs are $100, and when you produce 26 units, your total costs are $110. The market price for the product is $15. What should you do to maximize profits?

b. Suppose Robin's Clock Works produces in a perfectly competitive market. Suppose the ATC of clocks is $95, the AVC is $90 and the price of clocks is $85. The firm is currently producing at the level of output where MC equals price. What should the firm do to maximize its profits?

c. Suppose Peter's Clock Works produces in a perfectly competitive market. Suppose the ATC of clocks is $85, the AVC is $80 and the price of clocks is $82.50. The firm is currently producing at the level of output where MC equals price. What should the firm do to maximize its profits?

d. Austin sells golf balls in a perfectly competitive market. At its current level of golf ball production, his marginal costs equal to $1, and AVC is rising. If the market price of golf balls is $2, what should Austin do to maximize profits?

e. Austin sells golf balls in a perfectly competitive market. At its current level of golf ball production, his marginal costs equal to $2, and AVC is rising. If the market price of golf balls is $1, what should Austin do to maximize profits?

violetturtle959

QUESTION 22

For a perfectly competitive firm, profit maximization (or loss minimization) occurs at the level of output at which

	a.	MR = MC.
	b.	MR = AVC.
	c.	P = ATC.
	d.	MR = ATC.

4 points

QUESTION 23

If MR > MC, then

	a.	profits are being maximized.
	b.	the firm is producing too much of the good to be maximizing profits.
	c.	the firm can increase its profits (or minimize its losses) by increasing output.
	d.	the firm must be incurring losses.

4 points

QUESTION 24

If firms are earning zero economic profits, they must be producing at an output level at which

	a.	price minus marginal cost.
	b.	total revenue equals total costs, in other words, normal profits.
	c.	price equals average variable cost.
	d.	marginal revenue equals marginal cost.
	e.	none of the above

4 points

QUESTION 25

In the theory of perfect competition,

	a.	the market demand curve is horizontal.
	b.	the single firm faces a horizontal demand curve.
	c.	the single firm faces a downward-sloping demand curve.
	d.	the market demand curve is downward sloping.
	e.	b and d

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ECON 101 Lecture Notes - Lecture 16: Average Variable Cost, Demand Curve, Perfect Competition

ECON 101 Full Course Notes

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