Questions for Review

Jasriel Vera Hilary S. Maquiling

1. What are the main characteristics of a competitive market?

Many Competing Firms.
Similar Products Sold.
Equal Market Share.
Buyers have full information.
Ease of Entry and Exit.
2. Explain the difference between a firm's revenue and its profit? Which
do firms Maximize?
Revenue is the overall income made by the sale of goods or
services related to the company's primary operations.
Profit is the number of income that stays after recording financial
transactions for all expenses, debts, additional income streams,
and operating costs.
The general rule is that the firm maximizes profit by processing
that amount of output where marginal revenue = marginal cost.
3. Draw the cost curves for a typical firm. Explain how a competitive firm
chooses the level of output that maximizes profit.

Total cost Average fixed cost

Total Fixed cost Total Variable cost

Average Variable cost Average cost

Total Revenue
Marignal Cost
Cost Curves:
Total Fixed costs
do not change with output. It is run up when the return is
zero.
Total Variable costs
change with the change in the output.
Total costs
the addition of total fixed costs and total variable costs.
Average fixed costs
total fixed costs per output.
Average variable costs
total variable costs per output.
Average costs
total costs per output.
Marginal cost
the cost incurred by producing an extra unit of output.
A firm is in equilibrium when:
Distance between TR and TC should be maximum.
Total revenue is greater than total cost.
It maximizes its profit at that level of output when total
revenue (TR) is maximum than total cost (TC)which is
shown graphically below:
4. Under what condition will a firm shut down temporarily? Explain.
In the short run
For a firm that can't retrieve its fixed costs, firm will have no
choice but to shut down temporarily if the price of the good
is less than the average variable cost.
In the long run, when the firm could still recover both fixed
and variable costs, it will choose to exit if the price is less
than the average total cost.
5. Under what condition will a firm exit a market? Explain.
Firms will enter or exit the market until profit is driven to zero. In
the long run, price equals the minimum of average total cost.
6. Does a competitive firm's price equal its marginal cost in the short run,
in the long run, or both? Explain.
Both. A firm's price = marginal cost in the two, the short run and
the long run. In both the short run and the long run, price =
marginal revenue. The firm should expand output as long as
marginal revenue outrun the marginal cost, and reduce output if
marginal revenue is less than marginal cost.
7. Does a competitive firm's price equal the minimum of its average total
cost in the short run, in the long run, or both? Explain.
In the long run. The firm's price = the minimum of the average
total cost.
In the short run. The price may be bigger than the average total
cost, where the firm is gaining profits, or the price may be less
than the average total cost, in which case the firm is making
losses.
8. Are market supply curves typically more elastic in the short run or in
the long run? Explain.
The market supply is often more elastic in the long run. It is
supposed that in the long run, a firm can utilize all production
factors to higher the supply, considering, in the short run, the
firm can increase only labor.