ECON 402 Lecture Notes - Lecture 12: Average Variable Cost, Market Power, Sunk Costs
Course CodeECON 402
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1.1 For a market to be perfectly competitive, there must be many buyers and sellers, with all firms selling
identical products, and no barriers to new firms entering the market.
1.2A price taker is a firm that is unable to affect the market price. A firm is likely to be a price taker when
it represents a small fraction of the total market.
2.1In a perfectly competitive market, P = MR = AR because firms can sell as much output as they want
at the market price.
2.2 The following statements is true when the difference between TR and TC is at its maximum positive
value: MR = MC and the slope of TR = Slope of TC
2.3When maximizing profits, MR = MC is equivalent to P = MC because the marginal revenue curve for
a perfectly competitive firm is the same as its demand curve.
4.1 In the short run, a firm's shutdown point is the minimum point on the
4.2 In the short run, a firm's shutdown point is the minimum point on the average variable cost curve,
while in the long run, a firm's exit point is the minimum point on the average total cost curve. Firms willing
to accept losses in the short run but not in the long run when there are sunk costs in the short run but not
in the long run.
4.3 The market supply curve is derived by horizontally adding the individual firms' supply curves.
5.1Economic profits attract firms to enter an industry, and economic losses cause firms to exit an
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