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The demand curve of a perfectly competitive industry is ________; the demand curve of a perfectly competitive firm is ________.
downward sloping; horizontal
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A price taker is a firm that
faces a perfectly elastic demand curve.
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A firm under perfect competition is a price-taker because
it cannot affect the market price.
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Firms that seek to maximize profits will
choose the level of output where the difference between total revenue and total cost is the greatest.
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Marginal revenue in perfect competition equals
price and the change in total revenue from producing one more unit.
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In Exhibit 2, the profit-maximizing firm will produce how many units?
q 4
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In Exhibit 2, if price increases, profits
increase.
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A firm can minimize its losses by shutting down when
price is less than AVC.
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In Exhibit 3, losses at equilibrium are equal to area
jcfp
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In Exhibit 3, if price falls to m , the firm's losses will
equal total fixed costs.
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Profits in the short run are
equal to the difference between price and average total cost times the number of units sold.
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The firm should shut down in the short run if price falls below the minimum point of
average variable cost.
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In Exhibit 4, the perfectly competitive firm's short-run supply curve is
cdef
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If perfectly competitive firms are making economic profits, then
new firms will enter the industry.
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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.
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A decrease in demand causes the long-run equilibrium price to fall. One result is
reduced prices for some resource owners.
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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
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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.
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Along a long-run industry supply curve in perfect competition,
economic profits are zero.
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Productive efficiency is achieved when
firms produce at the minimum point of their long-run average cost curves
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Allocative efficiency is achieved when
p = MC
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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.
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Producer surplus is zero
when a constant-cost industry is in long-run equilibrium.
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The social welfare from production and consumption of a commodity is at a maximum when
price equals marginal cost.
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To maximize economic profit
increase production as long as each additional unit adds more to total revenue than total cost
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Golden rule
–Expand output: MR>MC
–Stop before MC>MR
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