Question

Discuss the four characteristics of perfect competition demand curve of a perfectly competitive firm is horizontal? price? B) Want to lower your price? Explain why or why not. change when market price changes? Explain. 3. A. B.Explain which of the four characteristics is primarily responsible for the fact that the C. If you owned a firm in a perfectly competitive market would you: A) Want to raise your D.Draw the demand curve for a firm under perfect competition. Would the demand curve E.How do you calculate the following? i) total revenue ii) average revenue ii) marginal revenue

Answer 1

In a competitive industry the firms don’t have much influence on price of their product. Each firm has the objective to maximize profit. To maximize profit the firm should produce the quantity such that marginal revenue equals marginal cost, which for a firm in a competitive industry means produce up until P=MC. If this equality does not hold the firm is producing either too little or too much. If P>MC then producing additional unit will add to the profit and firm will increase profit by increasing production. On the other hand, if P<MC then producing additional unit the firm will incur loss and will decrease production. That is when price is greater than MC it is producing too little and when price is less than MC it is producing too much.

The charecteristics of perfect competitive firm are

• In a competitive industry the firms don’t have much influence on price of their product. Each firm has the objective to maximize profit.
• The economic profit is total revenue minus total cost including implicit cost.
• The total revenue is equal to price time the quantity sold.
• The total cost is consisting of fixed cost and variable cost.
• The fixed cost is constant for all level of production.
• The variable cost changes with the level of output.