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ECON 203:Chapter 8 – Perfect Competition

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Ch08 Perfect Competition

Multiple Choice Questions

1. The term _________________ refers to a firm operating in a perfectly competitive market that must take the prevailing market price for its product.

A. price setter

B. business entity

C. price taker

D. trend setter

Answer: C  Reference:

Explanation:

2. ______________________ refers to the additional revenue gained from selling one more unit.

A. Marginal revenue

B. Total revenue

C. Economic profit

D. Accounting profit

Answer: A  Reference:

Explanation:

3. If a firm’s revenues do not cover its average variable costs, then that firm has reached its _________________ .

A. price taking point

B. shutdown point

C. marginal point

D. opportunity margin

Answer: B  Reference:

Explanation:

4. In economics, the term “shutdown point” refers to the point where the

A. marginal cost curve crosses the total revenue curve.

B. average variable cost curve crosses the total revenue curve.

C. average variable cost curve crosses the marginal cost curve.

D. marginal cost curve crosses the average variable cost curve.

Answer: D  Reference:

Explanation:

5. A manufacturer would likely make an ___________ in a market following the long-run process of beginning and expanding production in response to ________________ .

A. accounting profit; a strategy to grow profits

B. accounting profit; an incentive for profit

C. entry; a sustained pattern of profits

D. entry; an incentive to add to profits

Answer: C  Reference:

Explanation:

6. When a business adopts a strategy of reducing and/or discontinuing production in response to a sustained pattern of losses, it is

A. considering opportunity costs.

B. preparing to exit operations.

C. preparing to reach its shutdown point.

D. considering capital investments.

Answer: B  Reference:

Explanation:

7. An _________________  is calculated by subtracting the firm’s costs from its total revenues, _______________________________ .

A. accounting profit; excluding opportunity cost

B. accounting profit; including opportunity cost

C. economic profit; excluding opportunity cost

D. opportunity cost; including economic profit

Answer: A  Reference:

Explanation:

8. Economic profit can be derived from calculating total revenues minus all of the firm’s costs,

A. excluding its opportunity costs.

B. including its opportunity costs.

C. including its marginal revenue.

D. excluding its marginal revenue.

Answer: B  Reference:

Explanation:

11. A perfectly competitive industry is a

A. realistic extreme.

B. hypothetical assumption.

C. hypothetical extreme.

D. realistic assumption.

Answer: C  Reference:

Explanation:

12. The fact that a consumer is not required to buy the goods that a given firm produces, as well as the fact that the consumer might want the goods a firm produces, but may choose to buy from other firms instead

A. will reduce the revenue a firm receives and it should shut down.

B. means the firm has reached it shutdown point and should exit.

C. is part of the process to a sustained pattern of profits.

D. are two stark realities any business firm must recognize.

Answer: D  Reference:

Explanation:

13. It is said that in a perfectly competitive market, raising the price of a firm’s product from the prevailing market price of $179.00 to $199.00, ____________________.

A. will likely cause the firm to reach its shutdown point immediately

B. will cause the firm to recover some of its opportunity costs

C. could likely result in a notable loss of sales to competitors

D. is a sure sign the firm is raising the given price in the market

Answer: C  Reference:

Explanation:

14. If a perfectly competitive firm is a price taker, then

A. pressure from competing firms will force acceptance of the prevailing market price.

B. it must be a relatively small player compared to its competitors in the overall market.

C. it can increase or decrease its output without affecting overall quantity supplied in the market.

D. quality differences will be very perceptible and will play a major role in purchasers’ decisions.

Answer: A  Reference:

Explanation:

15. If the quality differences of similar products are mostly imperceptible to the average consumer’s eyes, which of the following will most likely play a major role in influencing the decisions of purchasers?

A. price of competing products

B. size of competing products

C. purchaser’s opportunity cost

D. geographic origin of products

Answer: A  Reference:

Explanation:

16. In the _________, the perfectly competitive firm will seek out ________________________ .

A. long run; the quantity of output where profits are highest

B. short run; profits by ignoring the concept of total cost analysis

C. short run;  the quantity of output where profits are highest

D. long run; methods to reduce production and shut down

Answer: C  Reference:

Explanation:

17. Idaho farmers can sell as large a quantity of their potato crop as they wish,

A. if they set their own price in the short run, but in the long run, the market sets the price.

B. provided each is willing to accept the prevailing market price.

C. if they set their own price in the long run, but in the short run, the market sets the price.

D. provided quality is perceptible and determines the market price.

Answer: B Reference:

Explanation:

18. In the ________, the perfectly competitive firm will react to profits by __________________________ .

A. short run; increasing quality of products

B. long run; tailoring their quality controls

C. short run; reducing its labor inputs

D. long run; increasing its production

Answer: D  Reference:

Explanation:

19. Firms operating in a market situation that creates ___________________, sell their product in a market with other firms who produce identical or extremely similar products.

A. a perfect monopoly

B. perfect competition

C. an oligopoly

D. a free-market

Answer: B  Reference:

Explanation:

20. Why are some producers forced to sell their products at the prevailing market price?

A. price takers find market analysis is too costly

B. they are very small players in the overall market

C. high degree of similarity to competitor’s products

D. they can increase output without affecting quality

Answer: C  Reference:

Explanation:

22. In the _________, if profits are not possible, the perfectly competitive firm will seek out the quantity of output where _____________________ .

A. long run; increasing production

B. short run; fixed costs can be reduced

C. short run;  losses are smallest

D. long run; fixed costs can be eliminated

Answer: C  Reference:

Explanation:

23. In the ________, the perfectly competitive firm will react to losses by __________________________ .

A. short run; reducing production or shutting down

B. long run; reducing production or shutting down

C. short run; increasing physical inputs

D. long run; increasing capital inputs

Answer: B  Reference:

Explanation:

24. Why would a profit-seeking firm need to tailor its decisions about the quantity of labor inputs that it purchases?

A. to produce the highest profitable quantity of output at the lowest possible marginal cost

B. deciding what quantity to produce is one of the major choices a profit-seeking firm makes

C. the quantity of labor is the only variable cost choice a profit-seeking firm can make

D. to produce the profit-maximizing quantity of output at the lowest possible average cost

Answer: D  Reference:

Explanation:

25. In a free market economy, firms operating in a perfectly competitive industry are said to have only one major choice to make.  Which of the following correctly sets out that choice?

A. what quantity to produce

B. what price to charge

C. what quantity of labor is needed

D. what quality to produce

Answer: A  Reference:

Explanation:

26. I’maSolarPanelCo. manufactures and distributes solar panels in the US market.  Two years ago, it had 5 US competitors, but government stimulus in the industry has encouraged 7 new US competitors to enter the market.  In these circumstances, I’maSolarPanelCo.’s price for its output

A. can be tailored to exceed the price of its inputs.

B. is dictated by the forces of demand and supply.

C. can be tailored to meet the price of its inputs.

D. can be set by management to maximize profits.

Answer: B  Reference:

Explanation:

Category: Analyze

27. I’maGoldMiner has benefited from a record rise in gold prices in the global commodities market.  While the price of its output is highly influenced by market speculation, if it wants to increase production to take advantage of the current profit-maximizing opportunity, the company

A. must accept market price for its physical capital inputs.

B. must reduce what it pays for inputs that make up its costs of production.

C. must reduce production to encourage speculators to drive gold prices higher.

D. must alter the price of its labor inputs to maximize profits.

Answer: A  Reference:

Explanation:

Category: Analyze

28. When I’MaGoldMiner chooses what quantity of gold each of it/s mines will produce over the next 12 months, this quantity, along with the prices prevailing in the market for output and inputs, will

A. determine the company’s annual revenue, variable costs and its profits.

B. no longer be dictated by the forces of demand and supply.

C. have no effect on the market forces of demand and supply.

D. determine the company’s total revenue, total costs, and its profits.

Answer: D  Reference:

Explanation:

Category: Analyze

29. If a graph is used to compare total revenue and total cost of a perfectly competitive firm, then the horizontal axis of the graph will represent the _______________ and the vertical axis will represent ______________________ .

A. price, measured in dollars; quantity of goods produced

B. total costs measured in dollars; quantity of goods produced

C. quantity produced; both total revenue and total costs, measured in dollars.

D. quantity produced; total revenue and total variable costs, measured in dollars.

Answer: C  Reference:

Explanation:

30. Under perfect competition, any profit-maximizing producer faces a market price equal to its

A. average costs

B. marginal costs

C. total costs

D. variable costs

Answer: B  Reference:

Explanation:

31.

Refer to the diagram above.  Which of the following explains the slope of the total revenue curve illustrated in this graph?

A. total revenue shown as a straight line sloping up indicates a perfectly competitive firm

B. the slope of the total revenue curve is determined by the price of the goods produced

C. at higher levels of output, diminishing returns will cause total cost to slope downward steeply

D. the slope of the total revenue curve is explained by both a and b above.

Answer: D  Reference:

Explanation:

32.

Refer to the diagram above.  In this instance, at the range of output represented at point b,

A. total costs exceed total revenues.

B. total revenues exceed total costs.

C. the firm is earning profits.

D. the firm should shut-down.

Answer: A  Reference:

Explanation:

Category: Analyze

33.

Refer to the diagram above.  In this instance, at the range of output represented at point c,

A. the shutdown point has been reached.

B. profits will be maximized.

C. physical input levels have been reduced.

D. capital input levels have been reduced.

Answer: B  Reference:

Explanation:

Category: Analyze

34.

Refer to the diagram above.  In this instance, the range of production possibilities at point d,

A. is a steeper slope reflecting increasing profits due to diminishing costs.

B. is a steeper slope reflecting a lower price.

C. is a steeper slope reflecting a return to losses due to diminishing returns.

D. is a steeper slope reflecting higher total revenue.

Answer: C  Reference:

Explanation:

Category: Analyze

35. In economic terms, a practical approach to maximizing profits requires an examination of how changes in production affect ________________ and ________________ .

A. total revenue; total cost

B. marginal revenue; marginal cost

C. total revenue; marginal cost

D. marginal revenue; total cost

Answer: B  Reference:

Explanation:

36. Given the data provided in the table below, the total revenue (TR) for production at quantity (Q) level 4 equals

Q P TC TR MR MC Profit
0 $5 $9        
1 $5 $10        
2 $5 $12        
3 $5 $15        
4 $5 $19        
5 $5 $24        
6 $5 $30        
7 $5 $45        

A. zero

B. $1.00

C. $15.00

D. $20.00

Answer: D  Reference:

Explanation:

37. Given the data provided in the table below, what will the marginal revenue equal for production at quantity (Q) level 4?

Q P TC TR MR MC Profit
0 $5 $9        
1 $5 $10        
2 $5 $12        
3 $5 $15        
4 $5 $19        
5 $5 $24        
6 $5 $30        
7 $5 $45        

A. $20.00

B. $15.00

C. $5.00

D. $1.00

Answer: C  Reference:

Explanation:

38. Given the data provided in the table below, what will the marginal cost equal for production at quantity (Q) level 4?

Q P TC TR MR MC Profit
0 $5 $9        
1 $5 $10        
2 $5 $12        
3 $5 $15        
4 $5 $19        
5 $5 $24        
6 $5 $30        
7 $5 $45        

A. $5.00

B. $4.00

C. $1.00

D. $3.00

Answer: B  Reference:

Explanation:

39. Given the data provided in the table below, what will the amount of profit be for production at quantity (Q) level 7?

Q P TC TR MR MC Profit
0 $5 $9        
1 $5 $10        
2 $5 $12        
3 $5 $15        
4 $5 $19        
5 $5 $24        
6 $5 $30        
7 $5 $45        

A. -$10.00

B. zero

C. -$5.00

D. $1.00

Answer: A  Reference:

Explanation:

40. Given the data provided in the table below, what will the fixed costs equal for production at quantity (Q) level 4?

Q P TC TR MR MC Profit
0 $5 $9        
1 $5 $10        
2 $5 $12        
3 $5 $15        
4 $5 $19        
5 $5 $24        
6 $5 $30        
7 $5 $45        

A. $35.00

B. $4.00

C. $36.00

D. $9.00

Answer: D  Reference:

Explanation:

41.

Refer to the diagram above.  In this instance, the marginal revenue curve

A. reflects a perfectly competitive firm

B. is equal to the price of the good

C. is a horizontal straight line

D. reflects each of the above

Answer: D  Reference:

Explanation:

42.

Refer to the diagram above.  In this instance, point e shown on the graph indicates

A. the point where profits will increase by increasing output

B. the point where profits will increase by reducing output

C. the profit-maximizing point where MR = MC

D. the profit-maximizing point where MR is less an MC

Answer: B  Reference:

Explanation:

Category: Analyze

43.

Refer to the diagram above.  Based on the information illustrated in this graph, which of the following is an accurate statement?

A. MC is initially downward sloping in the region of increasing MR at low output levels

B. As production increases, marginal revenue always increase so profits rise

C. as production decreases, marginal revenue will increase so profits will rise

D. a profit-seeking firm should continue to expand production as long as MR is less than MC

Answer: A  Reference:

Explanation:

44.

Refer to the diagram above.  Based on the information illustrated in this graph, which of the following is an accurate statement?

A. production should keep expanding because MR is always less than MC

B. because this is a perfectly competitive firm, the profit maximizing rule is not P = MC

C. because this is a perfectly competitive firm, the profit maximizing rule is not P = MR

D. profits will be reduced by production in the zone where MC exceeds MR

Answer: D  Reference:

Explanation:

45. For a perfectly competitive firm, the marginal cost curve is identical to the firm’s ________________ .

A. demand curve

B. supply curve

C. average total cost curve

D. average variable cost curve

Answer: B  Reference:

Explanation:

46. Temperatures have persisted below freezing levels in Florida throughout the months of December and January.  As a result, demand for electricity sharply increased and the price of electricity rose sharply.  The price of coal also rose.  In these circumstances, any resulting shifts in the supply curves for coal miners and electricity producers

A. will determine what price to produce at given the market demand.

B. at all levels of output shifts marginal costs to the right.

C. can also be interpreted as shifts of their respective marginal cost curves.

D. shifts marginal costs to the right enabling both to produce more at any given market price.

Answer: C  Reference:

Explanation:

47. If a competitive firm experiences a shift in costs of production that decreases marginal costs at all levels of output,

A. expanding output levels at any given price will be profitable.

B. producing less at any market price will off-set marginal cost .

C. the firm’s marginal cost curve will shift to the left.

D. the firm’s demand curve will also shift to the left.

Answer: A  Reference:

Explanation:

48. If the price that a firm charges is higher than its ________________ cost of production for that quantity produced, then the firm will earn profits.

A. marginal

B. variable

C. average

D. fixed

Answer: C  Reference:

Explanation:

49. If the price that a firm charges is lower than its ____________ of production, the firm will suffer losses.

A. average cost

B. marginal cost

C. fixed cost

D. variable cost

Answer: A  Reference:

Explanation:

50.

Refer to the diagram above.  At the point marked m,

A. price is determining production at a level where P = MC.

B. TR is exactly equal to TC, so profits equal zero.

C. price is above average cost of production.

D. the leftover rectangle is the profit earned.

Answer: B  Reference:

Explanation:

Category: Analyze

51. What happens in a perfectly competitive industry when economic profit is

greater than zero?

A. existing firms may expand their operations

B. firms may move along their LRAC curves to new outputs

C. there may be pressure on the market price to fall

D. new firms may enter the industry and all of the above

Answer: D  Reference:

Explanation:

52. If marginal cost is rising in a competitive firm’s short-run production process and its average variable cost is falling as output is increased, then

A.  marginal cost is above average variable cost.

B. marginal cost is below average fixed cost.

C. marginal cost is below average variable cost.

D. average fixed cost is constant.

Answer: C  Reference:

Explanation:

53. Kate’s 24-Hour Breakfast Diner menu offers one item, a $5.00 breakfast special.  Kate’s costs for servers, cooks, electricity, food, etc. average out to $3.95 per meal.  Her costs for rent, insurance cleaning supplies and business license average out to $1.25 per meal.  Since the market is highly competitive, Kate should

A. raise her prices above the perfectly competitive level set by the market.

B. keep the business open in the short-run, but plan to go out of business in the long-run.

C. keep the business open in the short-run, and plan to expand the business in the long-run.

D. lay-off her staff, break her lease, and close the business down immediately.

Answer: B  Reference:

Explanation:

Category: Analyze

54. Refer to the table below.  In this instance, confirmation that this firm is operating in a perfectly competitive market can readily be ascertained by the fact that its

Q P TR MR TC MC
0 $30 0 $15
1 $30 $30 $30 $25 $10
2 $30 $60 $30 $40 $15
3 $30 $90 $30 $60 $20
4 $30 $120 $30 $85 $25
5 $30 $150 $30 $115 $30
6 $30 $180 $30 $150 $35

A. marginal cost is increasing.

B. total cost is increasing.

C. economic profits are zero.

D. marginal revenue is constant.

Answer: D  Reference:

Explanation:

55. Refer to the table below.  In this instance, expansion of output

Q P TR MR TC MC
0 $30 0 $15
1 $30 $30 $30 $25 $10
2 $30 $60 $30 $40 $15
3 $30 $90 $30 $60 $20
4 $30 $120 $30 $85 $25
5 $30 $150 $30 $115 $30
6 $30 $180 $30 $150 $35

A. causes input prices to rise as demand for inputs increases.

B. leaves input prices constant as demand for inputs increases.

C. causes diseconomies of scale to occur.

D. occurs because of increasing returns to scale.

Answer: A  Reference:

Explanation:

56. In order to produce 100 oatmeal cookies, GoodieCookieCo incurs an average total cost of $0.25 per cookie.  The company’s marginal cost is constant at $0.10 for all oatmeal cookies produced.  The total cost to produce 50 oatmeal cookies is

A. $25

B. $20

C. $50

D. $60

Answer: B  Reference:

Explanation:

57. In order to produce 100 pairs of oven gloves, Marcia incurs an average total cost of $2.50 per pair.  Marcia’s marginal cost is constant at $10.00 for every pair of oven gloves produced.  The total cost to produce 50 pairs of oven gloves is

A. $250.00

B. $500.00

C. $300.00

D. $200.00

Answer: D  Reference:

Explanation:

58. If the average product for six workers is fifteen and the marginal

product of the seventh worker is eighteen, then

A. marginal product is rising.

B. marginal product is falling.

C. average product is rising.

D. average product is falling.

Answer: C  Reference:

Explanation:

59. In Sam’s greenhouse operation, labor is the only short term variable input.  After completing a cost analysis, if the marginal product of labor is the same for each unit of labor, this will imply that

A. the average product of labor is always equal to the marginal product of labor.

B. the average product of labor is always greater that the marginal product of labor.

C. the average product of labor is always less than the marginal product of labor.

D. as more labor inputs are used, the average product of labor inputs will fall.

Answer: A  Reference:

Explanation:

Category: Analyze

60. If accounting profits for a firm are 20% of output, and the opportunity cost of financial capital is 8% of output, then what do the firm’s economic profits equal?

A. 6% of output

B. 10% of output

C. 12% of output

D. 8% of output

Answer: C  Reference:

Explanation:

61. Neil’s Bakery is famous for its giant cinnamon buns.  The bakery has fixed costs of $100.  Neil must pay each worker a wage of $10.00 per hour and each works an 8 hour shift.  He earns $2 for each cinnamon bun that is sold.  The following table shows how many cinnamon buns he can sell, depending on the number of workers he hires.  Refer to the table below.  To maximize his profits in this competitive market, how many workers should he hire?

Labor Quantity
1 75
2 140
3 200
4 210
5 215

A. 2 workers

B. 3 workers

C. 4 workers

D. 5 workers

Answer: B  Reference:

Explanation:

62. In economics, labor demand is synonymous with

A. market demand.

B. average demand.

C. marginal demand.

D. derived demand.

Answer: D  Reference:

Explanation:

63. Even when competitive firms are unable to calculate marginal revenue product directly, _________________________________________ will push wage rates toward the marginal revenue product of labor.

A. planned future investment in physical capital

B. the pressures of competition in the labor market

C. the marginal workers ongoing skills training

D. wages that exceed workers’ net revenue product

Answer: B  Reference:

Explanation:

64. In a perfectly competitive market setting, which of the following would be a true statement?

A. Market price automatically sets itself exactly at equilibrium.

B. Market price rarely trends toward the equilibrium value.

C. Wage rates mirror marginal revenue product levels exactly.

D. Wage rates trend toward marginal revenue product levels.

Answer: D  Reference:

Explanation:

65. When a firm makes plans for investments in physical capital, it compares the _______________ on these investments with ______________________ .

A. projected rates of return; the cost of financial capital to the firm

B. present inputs of physical capital; future hurdle rates

C. present inputs of physical capita; future marginal revenue product

D. projected rates of return; the competitive pressures for labor

Answer: A  Reference:

Explanation:

66. The table below sets out the amount of capital needed for certain investment projects and the rate of return for each project.  What is this firm’s demand for physical capital if their hurdle rate is 5%?

Quantity of Financial Capital for Physical Capital Investment Projects Estimated Rate of Return for the Firm  
$18 million 2%
$15 million 4%
$12 million 6%
$8 million 8%
$3  million 10%

A. $11 million

B. $12 million

C. $23 million

D. $33 million

Answer: C  Reference:

Explanation:

67. The table below sets out the amount of capital needed for certain investment projects and the rate of return for each project.  What is this firm’s demand for physical capital if their hurdle rate is 8%?

Quantity of Financial Capital for Physical Capital Investment Projects Estimated Rate of Return for the Firm  
$6 million 1%
$5 million 3%
$4 million 5%
$1.5 million 7%
$500,000 9%

A. $1.5 million

B. $2 million

C. $250,000

D. $500,000

Answer: D  Reference:

Explanation:

68. When a firm uses retained profits to invest in more energy efficient equipment, an economist would calculate the _________________ of investing in physical capital.

A. typical hurdle rate

B. opportunity cost

C. degree of risk

D. hurdle rate premium

Answer: B  Reference:

Explanation:

69. Which of the following can be thought of as an adjustment for the risks involved with respect to the cost of a firm acquiring financial capital?

A. higher retained earnings from past profits

B. cost of financial capital paid by a firm

C. imposition of hurdle rates of interest

D. tax credits for physical capital investments

Answer: C  Reference:

Explanation:

70. If a firm is producing so that the point chosen along the production possibility frontier is socially preferred, then that firm is said to have reached its

A. allocative efficiency

B. productive efficiency

C. utility-maximizing efficiency

D. minimum price efficiency

Answer: A  Reference:

Explanation:

Essay Questions

1. Briefly explain what a market will show if perfectly competitive firms produce at the minimum of the long-run average cost curve and explain why this happens.  Briefly explain what the market will illustrate when perfectly competitive firms produce at the quantity where P = MC and explain why this happens.

Reference:

Explanation: When perfectly competitive firms produce at the minimum of the long-run average cost curve, the market will show productive efficiency, since all the firm’s are producing at the lowest possible average cost.

When perfectly competitive firms produce at the quantity where P = MC, the market will illustrate allocative efficiency, since each good is being produced up to the quantity where the amount that the good benefits society, which is measured by the price people are willing to pay, is equal to the cost to society, which is measured by the marginal cost of production.

2. Briefly explain the nature of a perfectly competitive firm.  Briefly discuss the effects of new entrants into a perfectly competitive market on existing firms that have profits in the short run.

Reference:

Explanation: A perfectly competitive firm is a price taker, which means that it must accept the prices at which its sell goods and the prices at which it purchases inputs as determined in the market.  Firms in a highly competitive market may earn profits in the short run,  but the entry of new firms or the expansion of existing firms means that such profits will not persist in the long run.

3. Briefly describe what the effect of producing a greater quantity of products will be in relation to a perfectly competitive firm.

Reference:

Explanation: As a perfectly competitive firm produces a greater quantity of output, its total revenue steadily increases at a constant rate determined by the given market price.

4. Briefly contrast when losses will be the smallest for a perfectly competitive firm based on total revenues with when losses for such a firm will be smallest based on marginal revenue.

Reference:

Explanation: Losses will be smallest for a completely competitive firm at the quantity of output where total revenues exceed total costs by the greatest amount, or where total revenues fall short of total costs by the smallest amount.  Alternatively, losses will be the smallest where marginal revenue, which is price for a perfectly competitive firm, is equal to marginal cost.

5. Briefly explain the relationship between market price and a firm’s profitability in perfectly competitive market.

Reference:

Explanation: If the market price faced by a perfectly competitive firm is above average cost at the profit-maximizing quantity of output, then the firm is making profits.  If the market price is below average cost at the profit-maximizing quantity of output, then the firm is making losses.  If the market price is at average cost, at the profit-maximizing level of output, then the firm is making zero profits.

6. Briefly explain how the zero profit point and the shutdown point for a firm operating in a perfectly competitive market are each determined.

Reference:

Explanation: For a firm operating in a perfectly competitive market, the point where the marginal cost curve crosses the average cost curve, at the minimum of the average cost curve, is called the zero profit point.  The point where that firm’s marginal cost curve crosses the average variable cost curve is called the shutdown point.

7. Briefly discuss physical capital investment and long-run average cost in relation to a perfectly competitive market.

Reference:

Explanation: In a perfectly competitive market, firms seek out the combination of variable inputs like labor and fixed inputs like physical capital investment inputs that will allow them to produce at the minimum of the long-run average cost curve.  If a firm does not produce at the lowest possible average cost, then firms with a lower cost of production will be able to sell at a lower price. Thus, the pressure of competition between firms will shape both the specific kinds of machinery and equipment and the overall quantity of investment in physical capital.

8. Briefly contrast how firms in a perfectly competitive market will respond to long-run profits and losses.  Include an explanation of each response affects the price level.

Reference:

Explanation: In the long run, firms will respond to profits through a process of entry, where existing firms expand output and new firms enter the market.  Conversely, firms will react to losses in the long run through a process of exit, in which existing firms reduce output or cease production altogether.  Through the process of entry in response to profits and exit in response to losses, the price level in a perfectly competitive market will move toward the zero-profit point where the marginal cost curve crosses the average cost curve, at the minimum of the average cost curve.

9. Briefly explain what is meant by: 1) account profit; 2) economic profit; and 3) zero economic profit.

Reference:

Explanation: Accounting profit is measured by taking total revenues and subtracting expenditures.  Economic profit is measured after taking total revenue, subtracting all expenditures, and also subtracting the opportunity cost of financial capital.  Thus, zero economic profit actually means a normal accounting rate of profit.

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inciteprofessor

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