Exam 9: B: Price Takers and the Competitive Process

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Amy runs a business in a market where all firms are price takers. Bill suggests that she lower her price to attract even more business. Should Amy follow Bill's suggestion, or should she even consider raising her price?

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Question 1

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If Amy lowers her price, this will reduce her total revenue. Since she can sell all of her product at the market price, there is no reason to sell at a lower price. Because of the nature of this market structure, she would lose all her business at a higher price, as her customers went to her competitors to purchase identical products. There is a reason for calling Amy a price taker.

When a firm is operating in a price-taker market, marginal revenue is

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Question 2

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Tom, a math major, examines Jane's economics class notes and observes that when price-taking firms earn economic profit, they do not seem to produce a quantity that minimizes their costs. Is he correct? Is there significance to this observation?

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Tom is right, but he is forgetting the fact that the most important goal motivating a firm is profit maximization. In equilibrium, the firm does minimize cost, but in a dynamic situation when the demand for the firm's product increases, the firm will take advantage of that change in demand. To produce an output that maximizes profit, the firm may have to pay employees overtime and use more costly suppliers for raw materials. Costs might be minimized at a different output, but the new level of output is produced at a minimum cost for that output, the firm's goal of maximizing profit is achieved, and consumers who want to buy the added output also gain.

When the demand for a product falls, why do costs of production go down in an increasing cost industry?

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Question 4

If the model of price-taking firms is so unrealistic and restrictive, why study it?

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Question 5

Competitive price-taker markets are characterized by

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Question 6

If the demand for pizza falls, pizza suppliers will suffer economic losses, and some firms will leave the industry. Why is this considered good? Shouldn't we feel sorry for these business owners?

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Question 7

Regarding costs of production, can a firm ever be at a point that is not on the marginal cost curve? Explain.

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Question 8

The competitive price-taker model is usually used to illustrate the competitive process. If firms cannot choose their price, where is the competition?

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Question 9

In a competitive price taker market, a firm's short-run supply curve is its

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Question 10

Which of the following products would most closely fit the competitive price-taker model?

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Question 11

If a technological advance lowers a firm's production costs, why do prices typically fall? Shouldn't the firm maintain the same price and earn economic profit?

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Question 12

When a competitive price-taker market is in long-run equilibrium

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Question 13

Even if a firm is optimistic about the future, why should it shut down if it cannot cover its variable cost? If it does shut down, are there ramifications not mentioned in the textbook?

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Question 14

The short-run market supply curve in a price-taker industry equals the horizontal sum of the individual firm's

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Question 15

"I'm losing money, but having invested so much in equipment, I simply cannot afford to shut down." If the firm were attempting to maximize profit, this decision may be

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Question 16

In some industries, like insurance, both small and very large firms coexist and compete quite effectively in the market. This indicates that the long-run average total cost curve in these industries

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Question 17

In some industries, like insurance, both small and very large firms coexist and compete quite effectively in the market. This indicates that the long-run average total cost curve in these industries

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Question 18

Why is it considered "ideal" for price to just equal marginal cost?

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Question 19

In a competitive market, profit can be considered a reward to businesses that

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Question 20

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Exam 9: B: Price Takers and the Competitive Process

Amy runs a business in a market where all firms are price takers. Bill suggests that she lower her price to attract even more business. Should Amy follow Bill's suggestion, or should she even consider raising her price?

When a firm is operating in a price-taker market, marginal revenue is

Tom, a math major, examines Jane's economics class notes and observes that when price-taking firms earn economic profit, they do not seem to produce a quantity that minimizes their costs. Is he correct? Is there significance to this observation?

When the demand for a product falls, why do costs of production go down in an increasing cost industry?

If the model of price-taking firms is so unrealistic and restrictive, why study it?

Competitive price-taker markets are characterized by

If the demand for pizza falls, pizza suppliers will suffer economic losses, and some firms will leave the industry. Why is this considered good? Shouldn't we feel sorry for these business owners?

Regarding costs of production, can a firm ever be at a point that is not on the marginal cost curve? Explain.

The competitive price-taker model is usually used to illustrate the competitive process. If firms cannot choose their price, where is the competition?

In a competitive price taker market, a firm's short-run supply curve is its

Which of the following products would most closely fit the competitive price-taker model?

If a technological advance lowers a firm's production costs, why do prices typically fall? Shouldn't the firm maintain the same price and earn economic profit?

When a competitive price-taker market is in long-run equilibrium

Even if a firm is optimistic about the future, why should it shut down if it cannot cover its variable cost? If it does shut down, are there ramifications not mentioned in the textbook?

The short-run market supply curve in a price-taker industry equals the horizontal sum of the individual firm's

"I'm losing money, but having invested so much in equipment, I simply cannot afford to shut down." If the firm were attempting to maximize profit, this decision may be

In some industries, like insurance, both small and very large firms coexist and compete quite effectively in the market. This indicates that the long-run average total cost curve in these industries

In some industries, like insurance, both small and very large firms coexist and compete quite effectively in the market. This indicates that the long-run average total cost curve in these industries

Why is it considered "ideal" for price to just equal marginal cost?

In a competitive market, profit can be considered a reward to businesses that

The Economic Approach

A: Some Tools of the Economist

B: Some Tools of the Economist

A: Supply, Demand, and the Market Process

B: Supply, Demand, and the Market Process

A: Supply and Demand: Applications and Extensions

B: Supply and Demand: Applications and Extensions

Difficult Cases for the Market and the Role of Government

The Economics of Collective Decision-Making

Consumer Choice and Elasticity

A: Costs and the Supply of Goods

B: Costs and the Supply of Goods

A: Price Takers and the Competitive Process

Price-Searcher Markets With Low Entry Barriers

A: Price-Searcher Markets With High Entry Barriers

B: Price-Searcher Markets With High Entry Barriers

The Supply of and Demand for Productive Resources

Earnings, Productivity, and the Job Market

Investment, the Capital Market, and the Wealth of Nations

Income Inequality and Poverty

Appendix: Government Spending and Taxation

Appendix: the Economics of Social Security

Appendix: the Stock Market: Its Function, Performance, and Potential As an Investment Opportunity

Appendix: Great Debates in Economics: Keynes Versus Hayek

Appendix: the Crisis of 2008: Causes and Lessons for the Future

Appendix: Lessons From the Great Depression

Appendix: the Economics of Healthcare

Appendix:education: Problems and Performance

Appendix: Earnings Differences Between Men and Women

Appendix: the Question of Resource Exhaustion

Appendix: Do Labor Unions Increase the Wages of Workers

Appendix: Difficult Environmental Cases and the Role of Government

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