ECO101H1 Lecture 15: Lecture 15-Perfect Competition pt.2

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copperclam445

1 Aug 2010

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Thursday, November 5th, 2009.

Perfect Competition

MR = MC => q* is profit-maximizing level of output

Question: Is firm earning economic profits?

Is firm breaking even (zero economic profits)?

Is firm suffering economic loss?

To answer: add ATC schedule Ù compare P to ATC

Economic Profit = Total Revenue

Minus

Total Opportunity Cost (Explicit + Implicit)

Most Important Implicit Opportunity Cost: Invested Capital (Equity)

,QYHVWHG&DSLWDOHDUQV³QRUPDOUDWHRISURILW´Æ Economic Profit = Zero

(and Accounting Profit is Positive)

Level of profits:

1. Firm maximizes profits by producing where P = MC

2. Levels of profits:

TR > TC => profits => TR/Q > TC/Q Ù P > ATC

TR = TC => breakeven Ù P = ATC

TR < TC => loss => TR/Q < TC/Q Ù P < ATC

MR [= P]

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Mr = mc => q* is profit-maximizing level of output. To answer: add atc schedule compare p to atc. Most important implicit opportunity cost: invested capital (equity) 3;0890/,59,0,7383472,7,904157419 economic profit = zero (and accounting profit is positive) Level of profits: firm maximizes profits by producing where p = mc, levels of profits: Tr > tc => profits => tr/q > tc/q p > atc. Tr = tc => breakeven p = atc. Tr < tc => loss => tr/q < tc/q p < atc www. notesolution. com. Profit: (p atc) * q = (25 20) * 10 = 50. Economic profit: (p atc) * q = (25 30) * 10 = -50. Decisions of perfectly competitive firm: summary: choose output (q) that maximizes profit. P = mc: determine if should shut down in short-run* P < avc shut down (otherwise, continue to produce q) www. notesolution. com: determine whether to exit industry in long-run.

Related Questions

1. A monopoly firm is different from a competitive firm in that:
A. There are many substitutes for the monopolist's product, whereas there are no close substitutes for the competitive firm's product
B. The monopolist's demand curve is perfectly inelastic, whereas the competitive firm's demand curve is perfectly elastic
C. The monopolist is a price-maker, whereas the competitive firm is a price-taker
D. The monopolist always earns economic profits in the long run, whereas the competitive firm never earns economic profits in the long run

2. In the long run, an entrepreneur managing a perfectly competitive firm will earn:
A. Zero normal profits B. Economic profits and normal profits
C. The opportunity cost of operating the firm D. Negative economic profits

3. Refer to the graph above. The maximum possible total profit this monopolist can earn per day is:
A. $0 B. $1800 C. $2400 D. $4200

4. If marginal cost exceeds marginal revenue, the firm

A. is most likely to be at a profit-maximizing level of output.

B. should increase the level of production to maximize its profit.

C. must be experiencing losses.

D. may still be earning a profit.

5. A perfectly competitive firm maximizes profit by producing 500 units of output

purplegerbil891

65) The long-run equilibrium of a perfectly competitive market will be characterized by firms A) producing at MES and earning zero economic profits. B) producing output less than MES but earning zero economic profits. C) producing output more than MES and possibly earning positive economic profits. D) producing at MES and possibly earning negative accounting profits. E) producing output less than the MES and possibly earning negative accounting profits.

The difference between zero accounting profit and zero economic profit is that:

(a) economists include opportunity cost in zero economic profit, while accountants do not include opportunity cost in zero accounting profit.

(b) economists do not include opportunity cost in zero economic profit, while accountants do include opportunity cost in zero accounting profit.

(c) economists include opportunity cost in zero accounting profit, while accountants do not include opportunity cost in zero economic profit.

(d) economists do not include opportunity cost in zero accounting profit, while accountants do include opportunity cost in zero economic profit.

yelloweagle292

ECO101H1 Lecture 15: Lecture 15-Perfect Competition pt.2

ECO101H1 Full Course Notes

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