Self-Check Questions

point, where the marginal cost curve crosses the AC curve at the minimum of the average cost curve. The long-run supply curve shows the long-run output supplied by firms in three different types of industries: constant cost, increasing cost, and decreasing cost.

8.4 Efficiency in Perfectly Competitive Markets

Long-run equilibrium in perfectly competitive markets meets two important conditions: allocative efficiency and productive efficiency. These two conditions have important implications. First, resources are allocated to their best alternative use. Second, they provide the maximum satisfaction attainable by society.

Self-Check Questions

1 . Firms in a perfectly competitive market are said to be “price takers”—that is, once the market determines an equilibrium price for the product, firms must accept this price. If you sell a product in a perfectly competitive market, but you are not happy with its price, would you raise the price, even by a cent? 2 . Would independent trucking fit the characteristics of a perfectly competitive industry? 3 . Look at Table 8.13. What would happen to the firm’s profits if the market price increases to $6 per pack of raspberries? Quantity Total Cost Fixed Cost Variable Cost Total Revenue Profit 0 $62 $62 - $0 −$62 10 $90 $62 $28 $60 −$30 20 $110 $62 $48 $120 $10 30 $126 $62 $64 $180 $54 40 $144 $62 $82 $240 $96 50 $166 $62 $104 $300 $134 60 $192 $62 $130 $360 $168 70 $224 $62 $162 $420 $196 80 $264 $62 $202 $480 $216 90 $324 $62 $262 $540 $216 100 $404 $62 $342 $600 $196 TABLE 8.13 4 . Suppose that the market price increases to $6, as Table 8.14 shows. What would happen to the profit- maximizing output level? Quantity Total Cost Fixed Cost Variable Cost Marginal Cost Total Revenue Marginal Revenue 0 $62 $62 - - $0 - 10 $90 $62 $28 $2.80 $60 $6.00 20 $110 $62 $48 $2.00 $120 $6.00 30 $126 $62 $64 $1.60 $180 $6.00 40 $144 $62 $82 $1.80 $240 $6.00 50 $166 $62 $104 $2.20 $300 $6.00 60 $192 $62 $130 $2.60 $360 $6.00 70 $224 $62 $162 $3.20 $420 $6.00 80 $264 $62 $202 $4.00 $480 $6.00 90 $324 $62 $262 $6.00 $540 $6.00 100 $404 $62 $342 $8.00 $600 $6.00 TABLE 8.14 5 . Explain in words why a profit-maximizing firm will not choose to produce at a quantity where marginal cost exceeds marginal revenue. 6 . A firm’s marginal cost curve above the average variable cost curve is equal to the firm’s individual supply curve. This means that every time a firm receives a price from the market it will be willing to supply the amount of output where the price equals marginal cost. What happens to the firm’s individual supply curve if marginal costs increase? 7 . If new technology in a perfectly competitive market brings about a substantial reduction in costs of production, how will this affect the market? 8 . A market in perfect competition is in long-run equilibrium. What happens to the market if labor unions are able to increase wages for workers? 9 . Productive efficiency and allocative efficiency are two concepts achieved in the long run in a perfectly competitive market. These are the two reasons why we call them “perfect.” How would you use these two concepts to analyze other market structures and label them “imperfect?” 10 . Explain how the profit-maximizing rule of setting P = MC leads a perfectly competitive market to be allocatively efficient.

Review Questions

11 . A single firm in a perfectly competitive market is relatively small compared to the rest of the market. What does this mean? How “small” is “small”? 12 . What are the four basic assumptions of perfect competition? Explain in words what they imply for a perfectly competitive firm. 13 . What is a “price taker” firm?