1. Strictly speaking, pure competition never has existed and probably never will

Question

1. Strictly speaking, pure competition never has existed and probably never will. Then why study it?

2. Why is the equality of marginal revenue and marginal cost essential for profit maximization in all market structures? Explain your reasoning.

3. Suppose that purely competitive firms producing cashews discover that price exceeds marginal cost. Will their combined output of cashews be too little, too much, or just right to achieve allocative efficiency? In the long run, what will happen to the supply of cashews and the price of cashews?

Explanation / Answer

1) It can be shown that pure competition results in low-cost production (productive efficiency) -through long-run equilibrium occurring where P equals minimum ATC - and allocative efficiency - through long-run equilibrium occurring where P equals MC. Given this, it is then possible to analyze real world examples to see to what extent they conform to the ideal of plants producing at their points of minimum ATC and thus producing the most desired commodities with the greatest economy in the use of resources. 2) Marginal measures change in total. For example, if the marginal revenue from producing and selling a unit of ouput is $5, then selling that unit increases the seller's revenue by $5. Suppose that a seller sells a quantity of output at which MR>MC. This implies that the last unit sold increased revenue more than it increased cost. As a result, profit will increase if the seller sells more output. This establishes that a quantity of output at which MR>MC cannot maximize profit. Now suppose that a seller sells a quantity of output at which MR

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