[Joseph_E._Stiglitz,_Carl_E._Walsh]_Economics(Bookos.org) (1)

Review and Practice
SUMMARY
1. A revenue curve shows the relationship between a firm’s
total output and its revenue. For a competitive firm, the
marginal revenue it receives from selling an additional
unit of output is the price of that unit.
2. A firm in a competitive market will choose the level of
output at which the market price—the marginal revenue
it receives from producing an extra unit—equals the
marginal cost.
3. A firm will enter a market if the market price for a good
exceeds its minimum average costs, since it can make
a profit by selling the good for more than it costs to
produce the good.
4. If the market price is below minimum average costs and
a firm has no sunk costs, the firm will exit the market
immediately. If the market price is below minimum average
costs and a firm has sunk costs, it will continue to
produce in the short run as long as the market price
exceeds its minimum average variable costs.
5. For a firm contemplating entering a market, its supply is
zero up to the point at which price equals minimum
average costs. Above that price, the supply curve is the
same as the marginal cost curve.
6. The market supply curve is constructed by adding up
the supply curves of all firms in an industry. As prices
rise, more firms are willing to produce, and each firm is
willing to produce more, so that the market supply curve
is normally upward sloping.
7. The economist’s and the accountant’s concepts of
profits differ in how they treat opportunity costs and
economic rents.
KEY TERMS
revenue curve
marginal revenue
economic rent
REVIEW QUESTIONS
1. In a competitive market, what rule determines the profitmaximizing
level of output? What is the relationship
between a firm’s supply curve and its marginal cost curve?
2. What determines firms’ decisions to enter a market? to
exit a market? Explain the role of the average variable
cost curve in determining whether firms will exit the
market.
3. Why is the long-run supply curve more elastic than the
short-run supply curve?
4. What is the relationship between the way accountants
use the concept of profits and the way economists use
that term?
PROBLEMS
1. The market price for painting a house in Centerville is
$10,000. The Total Cover-up House-Painting Company
has fixed costs of $4,000 for ladders, brushes, and so on,
and the company’s variable costs for house painting
follow this pattern:
Output
(houses painted) 2 3 4 5 6 7 8 9 10
Variable cost
(in thousands of dollars) 26 32 36 42 50 60 72 86 102
Calculate the company’s total costs, and graph the revenue
curve and the total cost curve. Do the curves have
the shape you expect? Over what range of production is
the company making profits?
2. Calculate and graph the marginal cost, the average
costs, and the average variable costs for the Total
Cover-up House-Painting Company. Given the market
price, at what level of output will this firm maximize
profits? What profit (or loss) is it making at that level?
At what price will the firm no longer make a profit?
Assume its fixed costs are sunk; there is no market
for used ladders, brushes, etc. At what price will the
company shut down?
3. Draw a U-shaped average cost curve. On your diagram,
designate at what price levels you would expect entry
and at what price levels you would expect exit if all the
fixed costs are sunk. What if only half the fixed costs are
sunk? Explain your reasoning.
4. José is a skilled electrician at a local company, a job that
pays $50,000 per year, but he is considering quitting to
start his own business. He talks it over with an account-
172 ∂ CHAPTER 7 THE COMPETITIVE FIRM