ECON 201Exam questions with
answers graded A+
Price takers - ANS✅✅firms that take or accept the market price and have no ability to influence
that price
Price searchers - ANS✅✅firms that chooses the price they charge for their product, but the
quantity they are able to sell is inversely related to price
Pure competition - ANS✅✅a market situation where there is a large number of independent
sellers offering identical products
barriers to entry - ANS✅✅obstacles that make it difficult for new firms to enter into a specific
market or industry
marginal revenue - ANS✅✅additional revenue from changing your production decision
change in revenue divided by the change in quantity
shut down - ANS✅✅to produce in the short run a firm must earn sufficient revenue to cover its
variable costs
· Large number of small firms
o No single firm can affect the price of the product
· Identical product
o Buyer has no preference between sellers
· Low barriers to entry
o No legal barriers
o Market barriers are low; being able to raise money to fund your spending - ANS✅✅What are the
characteristics of a purely competitive market?
, one important benefit of competition is a boost to innovation. Competition among companies can
spur the invention of new or better products, or more efficient processes. ... Innovation also benefits
consumers with new and better products, helps drive economic growth and increases standards of
living. - ANS✅✅how does competition promote prosperity?
if a firm chooses to maximize its profits, it must choose that level of output where Marginal Cost
(MC) is equal to Marginal Revenue (MR) and the Marginal Cost curve is rising. - ANS✅✅What is the
profit maximization rule? In other words, when a price taker is maximizing its profits, what will its
marginal revenue equal?
a situation in which, given the firms in the market, the price is such that that total amount the firms
wish to supply is equal to the total amount the consumers wish to demand - ANS✅✅What is the
short run equilibrium situation for a purely competitive firm?
shutdown: a firm has zero output (halts production) but still pays a fixed cost
going out of business: a firm has zero output and no fixed costs to pay - ANS✅✅What is the
difference between shutting down and going out of business?
in the short run a firm should continue to operate if price equals or exceeds average variable costs.
to produce in the short run a firm must earn sufficient revenue to cover its variable costs -
ANS✅✅Assume that firms are attempting to maximize their profits. When should a purely
competitive firm shut down in the short run?
occurs where the demand curve (price) intersects the marginal cost (MC) curve and the minimum
point of the average cost (AC) curve. economic profit cannot be sustained - ANS✅✅What is the
long run equilibrium situation for a purely competitive firm?
allocative efficiency - ANS✅✅this occurs when there is an optimal quantity of a good, considering
consumers' preference. A more precise definition is at an output level where the price equals the
Marginal Cost (MC) of production. This is because the price that consumers are willing to pay is
equivalent to the marginal utility that they get. Therefore, the optimal quantity is achieved when the
marginal utility of the good equals the marginal cost
x-inefficiency - ANS✅✅·occurs when a firm has little incentive to control costs. This causes the
average cost of production to be higher than necessary
· If a purely competitive firm does not have this, the firm's economic profit is zero (P = ATC)
· If a purely competitive firm has this, it will have below normal profits (P < ATC)
answers graded A+
Price takers - ANS✅✅firms that take or accept the market price and have no ability to influence
that price
Price searchers - ANS✅✅firms that chooses the price they charge for their product, but the
quantity they are able to sell is inversely related to price
Pure competition - ANS✅✅a market situation where there is a large number of independent
sellers offering identical products
barriers to entry - ANS✅✅obstacles that make it difficult for new firms to enter into a specific
market or industry
marginal revenue - ANS✅✅additional revenue from changing your production decision
change in revenue divided by the change in quantity
shut down - ANS✅✅to produce in the short run a firm must earn sufficient revenue to cover its
variable costs
· Large number of small firms
o No single firm can affect the price of the product
· Identical product
o Buyer has no preference between sellers
· Low barriers to entry
o No legal barriers
o Market barriers are low; being able to raise money to fund your spending - ANS✅✅What are the
characteristics of a purely competitive market?
, one important benefit of competition is a boost to innovation. Competition among companies can
spur the invention of new or better products, or more efficient processes. ... Innovation also benefits
consumers with new and better products, helps drive economic growth and increases standards of
living. - ANS✅✅how does competition promote prosperity?
if a firm chooses to maximize its profits, it must choose that level of output where Marginal Cost
(MC) is equal to Marginal Revenue (MR) and the Marginal Cost curve is rising. - ANS✅✅What is the
profit maximization rule? In other words, when a price taker is maximizing its profits, what will its
marginal revenue equal?
a situation in which, given the firms in the market, the price is such that that total amount the firms
wish to supply is equal to the total amount the consumers wish to demand - ANS✅✅What is the
short run equilibrium situation for a purely competitive firm?
shutdown: a firm has zero output (halts production) but still pays a fixed cost
going out of business: a firm has zero output and no fixed costs to pay - ANS✅✅What is the
difference between shutting down and going out of business?
in the short run a firm should continue to operate if price equals or exceeds average variable costs.
to produce in the short run a firm must earn sufficient revenue to cover its variable costs -
ANS✅✅Assume that firms are attempting to maximize their profits. When should a purely
competitive firm shut down in the short run?
occurs where the demand curve (price) intersects the marginal cost (MC) curve and the minimum
point of the average cost (AC) curve. economic profit cannot be sustained - ANS✅✅What is the
long run equilibrium situation for a purely competitive firm?
allocative efficiency - ANS✅✅this occurs when there is an optimal quantity of a good, considering
consumers' preference. A more precise definition is at an output level where the price equals the
Marginal Cost (MC) of production. This is because the price that consumers are willing to pay is
equivalent to the marginal utility that they get. Therefore, the optimal quantity is achieved when the
marginal utility of the good equals the marginal cost
x-inefficiency - ANS✅✅·occurs when a firm has little incentive to control costs. This causes the
average cost of production to be higher than necessary
· If a purely competitive firm does not have this, the firm's economic profit is zero (P = ATC)
· If a purely competitive firm has this, it will have below normal profits (P < ATC)
