Ledesma, Aubrey Jill I. BE 313 (6216) – Managerial Economics Quiz 3 February 26, 2022 1. Since any firm can freely enter and exit the market in perfect competition, it is expected that many buyers and sellers will engage and compete in the marketplace as well. However, to sustain fairness and competition in the market, everyone is considered a price-taker. This means that due to some factors that may influence the competition, the price is kept constant to benefit both the producers and consumers. This, in turn, forces everyone to abide by the rules over the market price of a product. Moreover, this scenario best applies that if a firm raises or lowers a product price, then there would be a chaotic buyer-seller interaction. 2. Because the suppliers have no control over the market price, they must focus on the quantity of the product that they should produce. To note; if the price will increase, the quantity supply will also increase. This idea shows that both the buyer and seller will maximize their resources only if MC=MR in which held also at an equal price. In graphical presentations, if the MC (supply curve) intersects with the MR (price) then that is the point where resources are maximized. 3. If a firm’s total cost is less than its benefits, this will produce more business opportunities for the firm. Moreover, in a perfectly competitive market, it would be profitable if a firm generates a level of output where the last unit's marginal revenue equals the marginal cost (MR = MC). For all units of production, marginal revenue is the equal market price (MR = P) in a perfectly competitive market. However, if MR>MC; the firm should increase the quantity of the product. On the other hand, if MR<MC; the firm should reduce the quantity of the product. These decisions are applied most of the time in all entities to maximize their profit. 4. The lowest price at which a firm can produce a product is when the price is also equal to the firm’s minimum AVC (P = min AVC). This happens if, at one point, the marginal cost and the long-run average variable costs have equal value. Moreover, in the long run, despite a firm’s zero profitability, it will still stay in the business because even though there is no profit, the owner will not take it as a loss. This is because there are opportunity costs that we should consider. Given that the total revenue is equal to the total variable costs, the revenue is still enough to cover the costs— not making the company sink in debt. 5. In the short run, the firm’s supply curve is part of the marginal cost curve because the marginal cost (MC) exactly represents the supply curve. Moreover, these two match above the minimum price of the AVC curve. So, if the price decreases below the AVC where P<AVC; the company will shut down. In this, we can say that when MC matches or equals the value of the AVC curve then, the average variable cost is at its lowest.
