The relationship between price , marginal cost, and average total cost in the long run equilibrium of the competitive market.

Question

George Stigler, "Perfect Competition, Historically Contemplated," Journal of Political Economy,Vol. 55, No. 1, (February 1957), pp. 1-17. Despite the fact that few firms sell identical products in markets where there are no barriers to entry, economists believe that the model of perfect competition is important because A. economists prefer studying theoretical markets instead of actual markets. B. all markets eventually become perfectly competitive. C. it is a benchmark—a market with the maximum possible competition—that economists use to evaluate actual markets that are not perfectly competitive. D. this is the type of market that our business laws protect and promote.

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Chapter 14, Problem 5CQQ

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The relationship between price, marginal cost, and average total cost in the long run equilibrium of the competitive market.

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George Stigler, "Perfect Competition, Historically Contemplated," Journal of Political Economy,Vol. 55, No. 1, (February 1957), pp. 1-17. Despite the fact that few firms sell identical products in markets where there are no barriers to entry, economists believe that the model of perfect competition is important because A. economists prefer studying theoretical markets instead of actual markets. B. all markets eventually become perfectly competitive. C. it is a benchmark—a market with the maximum possible competition—that economists use to evaluate actual markets that are not perfectly competitive. D. this is the type of market that our business laws protect and promote.

Assume that a firm in a competitive market faces the following cost information. If the market price for this firm's product is $40, calculate the profit maximizing level of output for this firm using marginal analysis. It may help to create your own cost table and fill in columns for Marginal Cost and Average Total Cost based on the Total Cost information below. a.What is the level of profit for this firm at the profit maximizing output? b.To convince yourself that the quantity you found is indeed the profit maximizing quantity, try calculating what the profit would be at the next higher level of output. What did you find? c. What do you predict will happen in this market over the long run?

The graph below shows cost curves for a typical firm operating in a perfectly competitive market. Curve 1 represents Marginal Cost (MC), Curve 2 represents Average Variable Costs (AVC) and Curve 3 represents Average Total Costs (ATC). Suppose that the equilibrium price is $12. What will happen in this market in the long run? a. No new entry/no exit. b.Existing firms will exit. c.New firms will enter.