ANSWERS TO End-of chapter QUESTIONS AND exercises

Answers to Questions for Review 1. (Market Structure) Define market structure. What factors are considered in determining the market structure of a particular industry Market structure refers to the important features that determine the level of competition in an industry. These factors include (a) the number of buyers and sellers, (b) the products degree of uniformity, (c) the ease with which new firms enter or old firms exit the market, and (d) the ways in which firms in the industry compete with each othersuch as through prices or advertising. 2. (Demand Under Perfect Competition) What type of demand curve does a perfectly competitive firm face Why The perfectly competitive firm faces a demand curve that is horizontal at the prevailing market price. This is the result of firms in the industry producing a commodity. No individual firm would want to raise its price above its competitors priceswhich is the market price. If it raised them, its customers would switch all of their purchases to competing firms, and the first firms sales would drop to zero. 3. (Total Revenue) Look back at Exhibit 3, panel (a) in this chapter. Explain why the total revenue curve is a straight line from the origin, whereas the slope of the total cost curve changes. If the firm is operating under conditions of perfect competition, its output decisions cannot affect the price in the market. Thus, the total revenue curve is a straight line determined by TR p q, where p is constant. This line runs through the origin and has a slope equal to the market price. The total cost curve, however, is determined by the production function as well as the prices of fixed and variable resources. The slope of the total cost curve varies because of increasing, then diminishing, returns. 4. (Profit in the Short Run) Look back at Exhibit 3, panel (b) in this chapter. Why doesnt the firm choose the output that maximizes average profit (i.e., the output for which average cost is the lowest)