Ch 15 Firms in Competitive Markets

When profit-maximizing firms in competitive markets are earning profits

• market demand must exceed market supply at the market equilibrium price

• market supply must exceed market demand at the market equilibrium price

• new firms will enter the market

• the most inefficient firms will be encouraged to leave the market

Suppose a firm is considering producing zero units of output. We call this exiting an industry in the short run and shutting down in the long run

• True

• False

Suppose that a firm in a competitive market faces the following revenues and costs:

The firm should not produce an output level beyond

• 4 units

• 5 units

• 6 units

• 7 units

The expression “Let bygones be bygones” is associated with what type of cost?

A competitive market begins in a situation of long-run equilibrium. Then, there is a decrease in demand. Describe the process that eventually leads to a new long-run equilibrium.

Answer explanation

The decrease in demand results in firms sustaining losses. In response to the losses, some firms exit the market, decreasing short-run supply. Eventually, short-run supply has decreased sufficiently to restore zero profits. At that point the market has reached a new long-run equilibrium.

Does a competitive firm have the ability to influence the quantity of output it supplies? Does it have the ability to influence its average revenue?

Answer explanation

A competitive firm has the ability to influence the quantity of output it supplies, but it does not have the ability to influence the price (average revenue).

Suppose a firm is considering producing zero units of output. We call this shutting down in the short run and exiting an industry in the long run.

• True

• False

A dairy farmer must be able to calculate sunk costs in order to determine how much revenue the farm receives for the typical gallon of milk.

• True

• False

A profit-maximizing competitive firm is earning a profit of $24,000. Its marginal cost is $17 and its average total cost is $13. How many units of output is the firm producing and selling?

Suppose that a firm in a competitive market faces the following revenues and costs:

If the firm is maximizing profit, how much profit is it earning?

• $0.50

• $7.50

• $10

• There is insufficient data to determine the firm's profit