Exam 6: Background to Supply: Firms in Competitive Markets

Use a graph to demonstrate the circumstances that would prevail in a perfectly competitive market where firms are experiencing economic losses. Identify costs, revenue, and the economic losses on your graph. Using your graph, determine whether an individual firm will shut down in the short run, or choose to remain in the market. Explain your answer.

A firm maximizes profit when it produces output up to the point where marginal cost equals marginal revenue.

In the short run, the market supply curve for a good is the sum of the quantities supplied by each firm at each price.

Bob Edwards owns a bagel shop. Bob hires an economist who assesses the shape of the bagel shop's average total cost (ATC) curve as a function of the number of bagels produced. The results indicate a U-shaped average total cost curve. Bob's economist explains that ATC is U-shaped for two reasons. The first is the existence of diminishing marginal product, which causes it to rise. What would be the second reason? Assume that the marginal cost curve is linear. (Hint: The second reason relates to average fixed cost)

Wages and salaries paid to workers are an example of implicit costs of production.

Economic profit is equal to total revenue minus

Use a graph to demonstrate the circumstances that would prevail in a competitive market where firms are earning economic profits. Can this scenario be maintained in the long run? Explain your answer.

In the short run, the competitive firm's supply curve is the

Which of the following markets would most closely satisfy the requirements for a competitive market?

Russell's Shoe Repair also produces custom-made shoes. When Mr. Russell produces 12 pairs a week, the marginal cost (MC) of the twelfth pair is €84, and the marginal revenue (MR) of that unit is €70. What would you advise Mr. Russell to do?

In a perfectly competitive market, the horizontal sum of all the individual firms' supply curves is

In the long-run, some firms will exit the market if the price of the good offered for sale is less than

What are opportunity costs? How do explicit and implicit costs relate to opportunity costs?

Nicole owns a small pottery factory. She can make 1,000 pieces of pottery per year and sell them for €100 each. It costs Nicole €20,000 for the raw materials to produce the 1,000 pieces of pottery. She has invested €100,000 in her factory and equipment: €50,000 from her savings and €50,000 borrowed at 10 per cent. (Assume that she could have loaned her money out at 10 per cent, too.) Nicole can work at a competing pottery factory for €40,000 per year. The accounting profit at Nicole's pottery factory is

The production process described above exhibits

In the short run, if the price a firm receives for a good is above its average variable costs but below its average total costs of production, the firm will temporarily shut down.

Accounting profit is equal to total revenue minus

If a production function exhibits diminishing marginal product, its slope

In long-run equilibrium in a competitive market, firms are operating at

Describe the difference between average revenue and marginal revenue. Why are both of these revenue measures important to a profit-maximizing firm?