Question

Name 1. Describe a perfectly competitive market structure in terms of number of firms, ease of entry a and product differentiation. 2. Draw the short-ran cost and revenue curves for a firm making an economic profit in a perfectly petitive industry. Show the firm's short-run supply curve. 3. Why might a firm continue to produce at a loss in the short na instead of shutting down? a perfectly competitive firm will make an economie profit in the short b. fP- profit - a perfectly competitive firm will make zero economic profit, or a normal SP a P - a perfectly competitive firm will continue to produce loss in the short run. , a perfectly competitive fim will shut down in the short run. 4 4. 3. .

Answer 1

1. Perfect competition market structure with following characteristics :- i) large number of sellers and buyers ii) free entry and exit iii) Hausgenous product iv) Perfect knowledge of prices and technology No government controls In this merket structure, none of the firms is large enough to influence industry. Also, the firms can get whatever amount of capital labour or technology required without delay. for an economic profit the price must be greeter cost levels as shown : Cost/ Revere/ supply than Price MC AC --- AROMR Cost - Denard → Profit area. 7 output output In the perfect competition , firm continues to produce if he can recover the average variable cost (po Ave - continue production even at loss) PC Ave - shut down point Fixed cost is not considered as it is paid regardless of production.

The film at loss and try revenue So, if the firm is better off in continuing to operete f it can cover its variable costs. to cover some fixed costs if some is leftover. price is greater than variable cost does not shutdown - hd P 7 AC : y average cost There is economic profit in short run Ас. Zero economie AVC spe AC perfectly competitive firm will cont-To produce at loss in short hon. AVO firm shuts down coverage variable cost)