Scribd Logo
Upload

Welcome to Scribd!

  • 47 views

    Chapter 14

    Uploaded by

    shfaisal713
    This document contains a chapter about firms in competitive markets and includes questions and answers about key concepts. It defines a competitive firm and explains how firms determine the profit-maximizing level of output by producing where marginal cost equals price. The chapter discusses the conditions under which firms will temporarily shut down if revenue is less than variable costs or permanently exit a market if revenue is less than total costs. It also notes that in both the short run and long run, price will equal marginal cost at the profit-maximizing quantity. The questions and problems that follow apply these concepts to specific scenarios about firms' costs and revenues.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd

    Chapter 14

    Uploaded by

    shfaisal713
    47 views3 pages
    This document contains a chapter about firms in competitive markets and includes questions and answers about key concepts. It defines a competitive firm and explains how firms determine the profit-maximizing level of output by producing where marginal cost equals price. The chapter discusses the conditions under which firms will temporarily shut down if revenue is less than variable costs or permanently exit a market if revenue is less than total costs. It also notes that in both the short run and long run, price will equal marginal cost at the profit-maximizing quantity. The questions and problems that follow apply these concepts to specific scenarios about firms' costs and revenues.

    Copyright

    © © All Rights Reserved

    Available Formats

    DOCX, PDF, TXT or read online from Scribd

    Did you find this document useful?

    Is this content inappropriate?

    This document contains a chapter about firms in competitive markets and includes questions and answers about key concepts. It defines a competitive firm and explains how firms determine the profit-maximizing level of output by producing where marginal cost equals price. The chapter discusses the conditions under which firms will temporarily shut down if revenue is less than variable costs or permanently exit a market if revenue is less than total costs. It also notes that in both the short run and long run, price will equal marginal cost at the profit-maximizing quantity. The questions and problems that follow apply these concepts to specific scenarios about firms' costs and revenues.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    47 views3 pages

    Chapter 14

    Uploaded by

    shfaisal713
    This document contains a chapter about firms in competitive markets and includes questions and answers about key concepts. It defines a competitive firm and explains how firms determine the profit-maximizing level of output by producing where marginal cost equals price. The chapter discusses the conditions under which firms will temporarily shut down if revenue is less than variable costs or permanently exit a market if revenue is less than total costs. It also notes that in both the short run and long run, price will equal marginal cost at the profit-maximizing quantity. The questions and problems that follow apply these concepts to specific scenarios about firms' costs and revenues.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    of 3

    CHAPTER 14

    Firms in Competitive Markets


    Question 1: What is meant by a competitive firm?
    Answer:
    A competitive firm is a firm in a market in which: (1) there are many buyers and many sellers in
    the market; (2) the goods offered by the various sellers are largely the same; and (3) usually
    firms can freely enter or exit the market.
    Question 2: Draw the cost curves for a typical firm. For a given price, explain how the firm
    chooses the level of output that maximizes profit.
    Answer:

    Figure shows the cost curves for a typical firm. For a given price (such as P*), the level
    of output that maximizes profit is the output where marginal cost equals price (Q*), as
    long as price exceeds average variable cost at that point (in the short run), or exceeds
    average total cost (in the long run).

    Question 3: Under what conditions will a firm shut down temporarily? Explain.
    Answer:
    A firm will shut down temporarily if the revenue it would get from producing is lower
    than the variable costs of production. This occurs if price is less than average variable
    cost.

    Question 4: Under what conditions will a firm exit a market? Explain.


    Answer:
    A firm will exit a market if the revenue it would get from remaining in business is less
    than its total cost. This occurs if price is less than average total cost.

    Question 5: Does a firm’s price equal marginal cost in the short run, in the long run, or both?
    Explain.
    Answer:
    A firm's price equals marginal cost in both the short run and the long run. In both the
    short run and the long run, price equals marginal revenue. The firm should increase
    output as long as marginal revenue exceeds marginal cost, and reduce output if
    marginal revenue is less than marginal cost. Profits are always maximized when
    marginal revenue equals marginal cost.

    Problems and Applications


    Question 1:
    Bob’s lawn-mowing service is a profit-maximizing, competitive firm. Bob mows lawns for $27
    each. His total cost each day is $280, of which $30 is a fixed cost. He mows 10 lawns a day.
    What can you say about Bob’s short-run decision regarding shutdown and his long-run decision
    regarding exit?
    Question 2:
    Consider total cost and total revenue given in the following table:

    Quantity Total Cost Total Revenue


    0 8 0
    1 9 8
    2 10 16
    3 11 24
    4 13 32
    5 19 40
    6 27 48
    7 37 56

    a. Calculate profit for each quantity. How much should the firm produce to maximize profit?
    b. Calculate marginal revenue and marginal cost for each quantity. Graph them. At what
    quantity do these curves cross? How does this relate to your answer to part (a)?
    c. Can you tell whether this firm is in a competitive industry? If so, can you tell whether the
    industry is in a long-run equilibrium?
    Question 3:
    Ball Bearings, Inc. faces costs of production as follows:

    a. Calculate the company’s average fixed costs, average variable costs, average total costs, and
    marginal costs at each level of production.
    b. The price of a case of ball bearings is $50. Seeing that she can’t make a profit, the Chief
    Executive Officer (CEO) decides to shut down operations. What are the firm’s profits/ losses?
    Was this a wise decision? Explain.
    Question 4:
    A profit-maximizing firm in a competitive market is currently producing 100 units of output. It
    has average revenue of $10, average total cost of $8, and fixed costs of $200.
    a. What is its profit?
    b. What is its marginal cost?
    c. What is its average variable cost?
    d. Is the efficient scale of the firm more than, less than, or exactly 100 units

    You might also like