Perfect Competition Reactions

Explain how perfectly competitive firms maximize profit in the short run.

• Produce at the quantity where fixed cost equals variable cost.

• Produce at the quantity where average cost equals average revenue.

• Produce at the quantity where marginal cost equals marginal revenue.

• Produce at the quantity where total cost equals total revenue.

Discuss the concept of shutdown point for perfectly competitive firms in the short run.

• Perfectly competitive firms do not have a shutdown point in the short run.

• The shutdown point is where the price exceeds the minimum average variable cost.

• The shutdown point is where the price equals the minimum average fixed cost.

• The shutdown point for perfectly competitive firms in the short run is where the price falls below the minimum average variable cost.

Describe the process of entry and exit of firms in the long run in a perfectly competitive market.

• Firms can only enter the market if they have government approval

• Firms can exit the market only if they have been in operation for a specific number of years

• Firms can freely enter or exit the industry based on economic profits, with new firms entering if profits exist and some firms exiting if losses occur.

• Firms can enter or exit the market based on the weather conditions

Explain why perfectly competitive firms earn zero economic profit in the long run.

• Perfectly competitive firms earn zero economic profit due to government subsidies

• Perfectly competitive firms earn zero economic profit in the long run due to free entry and exit leading to price being driven down to the level of minimum average total cost.

• Perfectly competitive firms earn zero economic profit due to fixed costs

• Perfectly competitive firms earn high economic profit due to monopoly power

Compare and contrast the behavior of perfectly competitive firms in the short run and in the long run.

• Perfectly competitive firms face no competition in the short run but intense competition in the long run

• Perfectly competitive firms have fixed costs in the short run and variable costs in the long run

• Perfectly competitive firms can make economic profits, losses, or break-even in the short run, but will earn normal profits in the long run due to free entry and exit of firms.

• Perfectly competitive firms always earn economic profits in the short run and long run