Test Prep For AP® Courses
Why will a perfectly competitive firm stay in a market, that is, choose not to exit, even if its economic profits are zero?
- Because the price it charges is not equal to zero, the firm still makes money.
- Demand elasticity for its product is greater than unity.
- The firm still makes accounting profits.
- As long as demand for the firm’s product exists, it stays in the market.
- It is not yet operating on the rising portion of its marginal cost curve.
In the long run, a perfectly competitive firm’s price will be equal to all of the following EXCEPT ____________.
- marginal cost
- marginal revenue
- minimum of average total cost
- minimum of average variable cost
- average revenue
A firm in perfect competition is currently making losses in the short run but has not yet shut down.
- Draw a graph in which marginal cost, marginal revenue, average variable cost, and average total cost curves are shown that describes this firm in short-run equilibrium earning losses. Indicate the price and quantity sold by this firm on your graph.
- Indicate the area of loss incurred by this firm on your graph.
- In one to two sentences, describe the process that will bring this market into long-run equilibrium.
- In your graph, illustrate the effects on equilibrium price caused by the process you described in part (c).