Deck 32: Prices and Profits in Perfect Competition

Question 1

Whats defention of terms:
-monopolistic competition

Answer 1

a market structure with elements of perfect competition and monopoly

Question 2

Whats defention of terms:
-oligopoly

Answer 2

industry has a few giant sellers, each of which controls a significant share of the market

Question 3

Whats defention of terms:
-perfect monopoly

Answer 3

there is only one seller of a product that has no close substitutes

Question 4

Whats defention of terms:
-perfectly competitive market

Question 5

Whats defention of terms:
-price maker

Question 6

Whats defention of terms:
-price taker

Question 7

Whats defention of terms:
-rule for maximizing profit under competition

Question 8

List and explain the assumptions and characteristics of the four market structures.
-Explain the significance of each assumption in terms of creating "perfect competition."

Question 9

List and explain the assumptions and characteristics of the four market structures.
-What assumptions of a perfectly competitive market are violated in each of the other market structures?

Question 10

Explain what it means and why firms in a competitive market are "price takers."
-Describe why it takes many firms in a market in order for an individual firm to be price taker.

Question 11

Explain what it means and why firms in a competitive market are "price takers."
-Use a supply and demand graph of a market to demonstrate and explain the price an individual firm "takes."

Question 12

Describe the demand curve facing the individual firm in a competitive market.
-Why is the individual firm's product demand curve horizontal? What happens if firms deviate from that price?

Question 13

Describe the demand curve facing the individual firm in a competitive market.
-Why is the assumption of homogenous products important for the horizontal demand curve of the individual firms?

Question 14

Explain the profit-maximizing level of output for the individual firm in a competitive market.
-Define and describe costs in the short run. Demonstrate their relationships graphically. What happens to MC if labor costs increase?

Question 15

Explain the profit-maximizing level of output for the individual firm in a competitive market.
-Explain why firms would not produce where MC>MR or where MC

Question 16

Understand criticism of the competitive market model and its assumptions.
-Why are there so few industries that would be considered perfectly competitive?

Question 17

Understand criticism of the competitive market model and its assumptions.
-Why and why not are agricultural markets an example of perfectly competitive markets?

Question 18

Understand the profit-maximizing level of output in the long run.
-Does earning a normal profit or when economic profit = 0 mean a firm is not earning a profit? Explain.

Question 19

Understand the profit-maximizing level of output in the long run.
-Why can there be excess profits in the short run but not in the long run?

Question 20

Explain the dynamics of the competitive market that ensure normal profits for all firms in the long run.
-What assumption(s) of competitive markets is critical for competing away excess profits? Explain.

Question 21

Explain the dynamics of the competitive market that ensure normal profits for all firms in the long run.
-Demonstrate graphically and explain what happens to excess profits in the long run.

Question 22

Which market structure(s) is characterized by a large number of firms and a large number of buyers?

A) perfect competition and oligopoly
B) perfect competition and monopoly
C) perfect competition and monopolistic competition
D) perfect competition and duopoly

Question 23

The term, "price taker" means that

A) a firm can dictate prices to its customers.
B) a firm must take the price determined in the market.
C) a firm must take the price dictated by its suppliers.
D) the price is different for take away.

Question 24

Atlas Flour finds that the market price for a 5 pound bag of its flour remains $9.00 whether it sells 1 bag or 1000. This information suggests that Atlas Flour is operating in

A) a perfectly competitive market.
B) an oligopolistic market.
C) a monopolisticaly competitive market.
D) a monopolistic market.

Question 25

Assume that a small firm, Blue Mill Flour Company, enters the perfectly competitive market for flour. The current market price is $8.40 per 5 pound bag. Blue Mill Flour decides that $8.75 would be a better price. What will happen if Blue Mill charges a price above the current market price?

A) Blue Mill will sell more flour.
B) Blue Mill will not sell quite as much flour.
C) Blue Mill will not sell any flour.
D) Blue Mill will sell the same amount of flour.

Question 26

Assume that a small firm, Blue Mill Flour Company, enters the perfectly competitive market for flour. The current market price is $8.40 per 5 pound bag. Blue Mill Flour decides that $8.00 would be a better price. What will happen if Blue Mill charges a price below the current market price?

A) Blue Mill will sell more flour.
B) Blue Mill will not sell quite as much flour.
C) Blue Mill will not sell any flour.
D) Blue Mill will sell the same amount of flour.

Question 27

What is the definition of marginal cost?

A) marginal cost = change in total cost/change in quantity
B) marginal cost = total cost/quantity
C) marginal cost = total cost - fixed cost
D) marginal cost = variable cost + fixed cost.

Question 28

-Identify the curves shown in Diagram 32a

A) line A is the average cost curve; line B is the marginal cost curve.
B) line A is the total cost curve; line B is the average cost curve.
C) line A is the marginal cost curve; line B is the average cost curve.
D) line A is the supply curve; line B is the demand curve.

Question 29

Assume that Dubuque Flour Company is currently selling a 5 pound bag of flour for $8.40. Marginal cost per 5 pound bag is $8.40, and average cost is $8.00.

A) Dubuque Flour Company is in short term equilibrium and long term equilibrium.
B) Dubuque Flour Company is not in short term equilibrum nor is it in long term equilibrium.
C) Dubuque Flour Company is in short term equilibrium but not in long term equilibrium.
D) Dubuque Flour Company is not in short term equilibrium but it is in long term equilibrium.

Question 30

Assume that Boise Flour Company is currently selling a 5 pound bag of flour for $8.00. Marginal cost per 5 pound bag is $8.00, and average cost is $8.00.

A) Dubuque Flour Company is in short term equilibrium and in long term equilibrium.
B) Dubuque Flour Company is not in short term equilibrum nor is it in long term equilibrium.
C) Dubuque Flour Company is in short term equilibrium but not in long term equilibrium.
D) Dubuque Flour Company is not in short term equilibrium but it is in long term equilibrium.