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Principles of Microeconomics for AP® Courses 2e

Steven A. Greenlaw, David Shapiro, Timothy Taylor

Chapter 8

Perfect Competition

Educators


Problem 1

Firms in a perfectly competitive market are said to be price takers - that is, once the market determines an equilibrium price for the product, firms must accept this price. If you sell a product in a perfectly competitive market, but you are not happy with its price, would you raise the price. even by a cent?

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Problem 2

Would independent trucking fit the characteristics of a perfectly competitive industry?

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Problem 3

Look at Table $8.13 .$ What would happen to the firm's profits if the market price increases to $\$ 6$ per pack of rasperries?

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Problem 4

Suppose that the market price increases to $\$ 6,$ as Table 8.14 shows. What would happen to the profit-maximizing output level?

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Problem 5

Explain in words why a profit-maximizing firm will not choose to produce at a quantity where marginal cost exceeds marginal revenue.

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Problem 6

A firm's marginal cost curve above the averable cost curve is equal to the firm's individual supply curve. This means that every time a firm receive a price from the market it will be willing to supply the amount of output where the price equals marginal cost. What happens to the firm's individual supply curve if marginal costs increase?

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Problem 7

If new technology in a perfectly competitive market brings about a substantial reduction in costs of production, how will this affect the market?

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Problem 8

A market in perfect competition is in long-run equilibrium. What happens to the market if labor unions are able to increase wages for workers?

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Problem 9

Productive efficiency and allocative efficiency are two concepts achieved in the long run in a perfectly competitive market. These are the two reasons why we call them perfect. How would you use two concepts to analyze other market structures and label them imperfect?

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Problem 10

Explain how the profit-maximizing rule of setting $\mathrm{P}=\mathrm{MC}$ leads a perfectly competitive market to be allocatively efficient.

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Problem 11

A single firm in a perfectly competitive market is relatively small compared to the rest of the market. What does this mean? How small is small?

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Problem 12

What are the four basic assumptions of perfect competition? Explain in words what they imply for a
perfectly competitive firm.

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Problem 13

What is a price taker firm?

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Problem 14

How does a perfectly competitive firm decide what price to charge?

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Problem 15

What prevents a perfectly competitive firm from seeking higher profits by increasing the price that it
charges?

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Problem 16

How does a perfectly competitive firm calculate total revenue?

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Problem 17

Briefly explain the reason for the shape of a marginal revenue curve for a perfectly competitive firm.

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Problem 18

What two rules does a perfectly competitive firm apply to determine its profit-maximizing quantity of output?

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Problem 19

How does the average cost curve help to show whether a firm is making profits or losses?

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Problem 20

What two lines on a cost curve diagram intersect at the zero-profit point?

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Problem 21

Should a firm shut down immediately if it is making losses?

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Problem 22

How does the average variable cost curve help a firm know whether it should shut down immediately?

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Problem 23

What two lines on a cost curve diagram intersect at the shutdown point?

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Problem 24

Why does entry occur?

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Problem 25

Why does exit occur?

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Problem 26

Do entry and exit occur in the short run, the long run, both, or neither?

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Problem 27

What price will a perfectly competitive firm end up charging in the long run? Why?

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Problem 28

Will a perfectly competitive market display productive efficiency? Why or why not?

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Problem 29

Will a perfectly competitive market display allocative efficiency? Why or why not?

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Problem 30

Finding a life partner is a complicated process that may take many years. It is hard to think of this process as being part of a very complex market, with a demand and a supply for partners. Think about how this market works and some of its characteristics, such as search costs. Would you consider it a perfectly competitive market?

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Problem 31

Can you name five examples of perfectly competitive markets? Why or why not?

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Problem 32

Your company operates in a perfectly competitive market. You have been told that advertising can help you increase your sales in the short run. Would you create an aggressive advertising campaign for your product?

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Problem 33

since a perfectly competitive firm can sell as much as it wishes at the market price, why can the firm not simply increase its profits by selling an extremely high quantity?

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Problem 34

Many firms in the United States file for bankruptcy every year, yet they still continue operating. Why would they do this instead of completely shutting down?

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Problem 35

Why will profits for firms in a perfectly competitive industry tend to vanish in the long run?

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Problem 36

Why will losses for firms in a perfectly competitive industry tend to vanish in the long run?

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Problem 37

Assuming that the market for cigarettes is in perfect competition, what does allocative and productive efficiency imply in this case? What does it not imply?

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Problem 38

In the argument for why perfect competition is allocatively efficient, the price that people are willing to pay represents the gains to society and the marginal cost to the firm represents the costs to society. Can you think of some social costs or issues that are not included in the marginal cost to the firm? Or some social gains that are not included in what people pay for a good?

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Problem 39

The AAA Aquarium Co. sells aquariums for $\$ 20$ each. Fixed costs of production are $\$ 20 .$ The total variable costs are $\$ 20$ for one aquarium, $\$ 25$ for two units, $\$ 35$ for the three units, $\$ 50$ for four units, and $\$ 80$ for five units. In the form of a table, calculate total revenue, marginal revenue, total cost, and marginal cost for each output level (one to five units). What is the profit-maximizing quantity of output? On one diagram, sketch the total revenue and total cost curves. On
another diagram, sketch the marginal revenue and marginal cost curves.

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Problem 40

Perfectly competitive firm Doggies Paradise Inc. sells winter coats for dogs. Dog coats sell for $\$ 72$ each. The fixed costs of production are $\$ 100 .$ The total variable costs are $\$ 64$ for one unit, $\$ 84$ for two units, $\$ 114$ for three units, $\$ 184$ for four units, and $\$ 270$ for five units. In the form of a table, calculate total revenue, marginal revenue, total cost and marginal cost for each
output level (one to five units). On one diagram, sketch the total revenue and total cost curves. On another diagram, sketch the marginal revenue and marginal cost curves. What is the profit maximizing quantity?

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Problem 41

A computer company produces affordable, easy-to- use home computer systems and has fixed costs of $\$ 250 .$ The marginal cost of producing computers is $\$ 700$ for the first computer, $\$ 250$ for the second, $\$ 300$ for the third, $\$ 350$ for the fourth, $\$ 400$ for the fifth, $\$ 300$ for the sixth, and $\$ 500$ for the seventh.
a. Create a table that shows the company's output, total cost, marginal cost, average cost, variable cost, and average variable cost.
b. At what price is the zero-profit point? At what price is the shutdown point?
c. If the company sells the computers for $\$ 500,$ is it making a profit or a loss? How big is the profit or loss? Sketch a graph with AC, MC, and AVC curves to illustrate your answer and show the
profit or loss.
d. If the firm sells the computers for $\$ 300,$ is it making a profit or a loss? How big is the profit or loss? Sketch a graph with $\mathrm{AC}, \mathrm{MC}$ , and AVC curves to illustrate your answer and show the profit or loss.

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