› Answers and Explanations
138 › Step 4. Review the Knowledge You Need to Score High
- A—The firm only operates if the total revenue is
at least as great as total variable cost. On a per unit
basis, the firm must receive a P=MR that is at
least as great as AVC. Since firms pay TFC regard-
less of production, they are not a factor in
whether you should shut down. Choices B, C,
and E are wrong because TC and ATC include the
fixed costs. Choice D is incorrect because it might
not be the profitable strategy, but it is irrelevant to
the shutdown decision. - B—Monopoly has barriers to entry (e.g., patents)
and the monopolistic competitive firm does not.
Choices A, C, and D are true of monopolistic
competition and monopoly. - E—With P >ATC, you should recognize that
positive economic profits exist. Firms enter and
price falls toward the breakeven point, so any
mention of exit or rising prices can be eliminated.
Entry also increases the market quantity of the
good produced.
4. A—If Brent chooses to buy his bread early in the
morning rather than in the evening, this is not
price discrimination. The other choices describe
buying in bulk, redeeming a coupon, or paying a
lower price because of the time in which one con-
sumes the good. The nightclub example is price
discrimination based upon gender.
5. B—For each firm, choosing the costly advertising
campaign is the dominant strategy. This is an
example of the prisoners’ dilemma.
6. D—Allocative inefficiency and deadweight loss in
anymarket structure is when P>MC.
› Rapid Review
Perfect competition:The most competitive market structure is characterized by many
small price-taking firms producing a standardized product in an industry in which there are
no barriers to entry or exit.Profit Maximizing Rule: All firms maximize profit by producing where MR =MC.Breakeven point:The output where ATC is minimized and economic profit is zero.Shutdown point:The output where AVC is minimized. If the price falls below this point,
the firm chooses to shut down or produce zero units in the short run.Perfectly competitive long-run equilibrium:Occurs when there is no more incentive for
firms to enter or exit. P=MR =MC =ATC and P=0.Normal profit:Another way of saying that firms are earning zero economic profits or a fair
rate of return on invested resources.Constant cost industry:Entry (or exit) of firms does not shift the cost curves of firms in
the industry.Increasing cost industry:Entry of new firms shifts the cost curves for all firms upward.Decreasing cost industry:Entry of new firms shifts the cost curves for all firms downward.Monopoly:The least competitive market structure; it is characterized by a single producer,
with no close substitutes, barriers to entry, and price-making power.http://www.ebook3000.com