# Chapter 8 Microeconomics (Exam 3)

 The demand curve of a perfectly competitive industry is ________; the demand curve of a perfectly competitive firm is ________. downward sloping; horizontal  A price taker is a firm that faces a perfectly elastic demand curve.  A firm under perfect competition is a price-taker because  it cannot affect the market price.  Firms that seek to maximize profits will choose the level of output where the difference between total revenue and total cost is the greatest. Marginal revenue in perfect competition equals price and the change in total revenue from producing one more unit.  In Exhibit 2, the profit-maximizing firm will produce how many units? q 4 In Exhibit 2, if price increases, profits increase. A firm can minimize its losses by shutting down when price is less than AVC. In Exhibit 3, losses at equilibrium are equal to area jcfp  In Exhibit 3, if price falls to m , the firm's losses will equal total fixed costs. Profits in the short run are equal to the difference between price and average total cost times the number of units sold. The firm should shut down in the short run if price falls below the minimum point of average variable cost. In Exhibit 4, the perfectly competitive firm's short-run supply curve is cdef  If perfectly competitive firms are making economic profits, then new firms will enter the industry. Suppose a constant-cost, perfectly competitive industry is in long-run equilibrium, and then demand increases. Eventually, a new long-run equilibrium is reached. Output for a firm originally in the industry initially increases and then returns to its original level. A decrease in demand causes the long-run equilibrium price to fall. One result is reduced prices for some resource owners. In an increasing-cost, perfectly competitive industry, -existing firms' costs increase as output increases-new entrants bid up the price of resources used in the industry-economic profits are zero in long-run equilibrium-the long-run supply curve slopes upward An increasing-cost, perfectly competitive industry is in long-run equilibrium. If industry demand decreases, the new long-run equilibrium will be characterized by a lower equilibrium price. Along a long-run industry supply curve in perfect competition, economic profits are zero.  Productive efficiency is achieved when firms produce at the minimum point of their long-run average cost curves Allocative efficiency is achieved when p = MC  Producer surplus is greater in the short run than in the long run because the short-run supply curve is more inelastic than the long-run supply curve.  Producer surplus is zero when a constant-cost industry is in long-run equilibrium.  The social welfare from production and consumption of a commodity is at a maximum when price equals marginal cost. To maximize economic profit increase production as long as each additional unit adds more to total revenue than total cost Golden rule  –Expand output: MR>MC –Stop before MC>MR Authorstraightupdeme ID182824 Card SetChapter 8 Microeconomics (Exam 3) DescriptionChapter 8 Microeconomics (Exam 3) Updated2012-11-11T01:36:36Z Show Answers