1 Answer the following questions and briefly explain: (a) What assumptions are n
ID: 1231430 • Letter: 1
Question
1 Answer the following questions and briefly explain:(a) What assumptions are necessary for a market to be perfectly competitive? In light of what you have learned in this chapter, why is each of these assumptions important? (Hint: consider perfectly competitive firms’ demand curve, market power and long-run economic profits with these assumptions.)
(b) In what condition will a perfectly competitive firm that incurs economic losses choose to produce rather than shut down in the short run? Why will the firm do so?
(c) Should a firm produce at an output level at which long-run average cost is minimized? Explain. What is the economic profit that all firms earn in a perfectly competitive industry in the long run equilibrium?
Explanation / Answer
a) Unlimited buyers and sellers, no entry and exit barriers, Perfect factor mobility, Perfect information, no transaction costs, Profit maximization, Homogeneous products, and non-increasing returns to scale b) If the revenue the firm is receiving is greater than its total variable cost (R > VC) then the firm is covering all variable cost plus there is additional revenue, then it should keep producing. c) A firm cannot continue to incur losses indefinitely. In the long run, the firm will have to earn sufficient revenue to cover all its expenses. The long-run decision is based on the relationship of the price and long-run average costs. If average cost is greater than profit, the firm will not survive. The firm will only make enough money is necessary to cover its economic costs
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.