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Chapter Review Chapter 8: The Competitive Firm

  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.
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