Critical Thinking Questions

14 . How does a perfectly competitive firm decide what price to charge? 15 . What prevents a perfectly competitive firm from seeking higher profits by increasing the price that it charges? 16 . How does a perfectly competitive firm calculate total revenue? 17 . Briefly explain the reason for the shape of a marginal revenue curve for a perfectly competitive firm. 18 . What two rules does a perfectly competitive firm apply to determine its profit-maximizing quantity of output? 19 . How does the average cost curve help to show whether a firm is making profits or losses? 20 . What two lines on a cost curve diagram intersect at the zero-profit point? 21 . Should a firm shut down immediately if it is making losses? 22 . How does the average variable cost curve help a firm know whether it should shut down immediately? 23 . What two lines on a cost curve diagram intersect at the shutdown point? 24 . Why does entry occur? 25 . Why does exit occur? 26 . Do entry and exit occur in the short run, the long run, both, or neither? 27 . What price will a perfectly competitive firm end up charging in the long run? Why? 28 . Will a perfectly competitive market display productive efficiency? Why or why not? 29 . Will a perfectly competitive market display allocative efficiency? Why or why not?

Critical Thinking Questions

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? 31 . Can you name five examples of perfectly competitive markets? Why or why not? 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? 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? 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? 35 . Why will profits for firms in a perfectly competitive industry tend to vanish in the long run? 36 . Why will losses for firms in a perfectly competitive industry tend to vanish in the long run? 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? 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?

Problems

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. 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? 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, $450 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 AC, MC, and AVC curves to illustrate your answer and show the profit or loss.