Econ102 -WEEK 6

• What is the assumption regarding the number of buyers and sellers in perfect competition?

  The market has many buyers and many sellers.
• What does homogeneity of output mean in perfect competition?

  Firms produce identical products.
• Why do firms in perfect competition act as price takers?

  No one firm has the power to determine the price due to many sellers of identical goods.
• What is the condition regarding barriers to entry or exit in perfect competition?

  There are no barriers to entry or exit.
• What is meant by perfect information in the context of perfect competition?

  All participants have complete knowledge about prices and products.
• What is the short-run assumption regarding the amount of capital employed in perfect competition?

  The amount of capital employed is fixed.
• Why is perfect competition considered the benchmark of efficiency?

  It represents an ideal market structure where resources are allocated efficiently.
• What is the formula for profit maximization in perfect competition?

  Profit is maximized where \(\pi = TR - TC\).
• How is total revenue calculated?

  Total revenue = price x quantity sold.
• How is marginal revenue defined?

  Marginal revenue is the additional revenue from selling one additional unit of output.
• What is the relationship between average revenue and price in perfect competition?

  Average revenue equals price.
• If the price is given at 20, what is the marginal revenue when total revenue is \(TR = 20q\)?

  Marginal revenue is 20.
• Where is profit maximized in relation to marginal cost and marginal revenue?

  Profit is maximized where marginal cost cuts marginal revenue from below.
• What does it mean when \(p = MC\) in a perfectly competitive market?

  It indicates the profit-maximizing output level.
• What does the shaded area in the profit maximization diagram represent?

  The shaded area represents supernormal profit.
• Given the total cost curve \(TC = 5 + 2q^2\), how do you calculate the profit-maximizing quantity when the price is 16?

  Calculate where marginal cost equals 16.
• What is the short-run shutdown condition for a firm?

  A firm should shut down if price is less than average variable cost (AVC).
• What is the industry supply curve in perfect competition?

  The industry supply curve is the horizontal sum of individual firms' supply curves.
• In a perfectly competitive market with 8 identical firms, how do you find the short-run market equilibrium?

  Find where market demand equals market supply.
• What occurs in long-run competitive equilibrium?

  Market price equals minimum average total cost, and firms earn zero economic profit.
• What happens when supernormal profits exist in a perfectly competitive market?

  New entrants are attracted, increasing supply and pushing the price down.
• What is allocative efficiency in the context of perfect competition?

  It occurs when firms produce output at minimum average cost.
• What are the key assumptions of perfect competition?

  • Many buyers and sellers
  • Homogeneity of output
  • Price takers
  • No barriers to entry or exit
  • Perfect information and low transaction costs
• What are the characteristics of profit maximization in the short run?

  • Profit maximization occurs where \(MR = MC\)
  • Supernormal profit exists when \(TR > TC\)
  • Firms may continue production if covering variable costs
• What is the process of achieving long-run competitive equilibrium?

  • Free entry and exit of firms
  • Market price equals minimum average total cost
  • Firms earn zero economic profit
  • No incentive for further entry or exit