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Chapter 8: Q15 (page 212)

What prevents a perfectly competitive firm from seeking higher profits by increasing the price that it charges?

Short Answer

Expert verified

Perfect competitive firm can't charge higher price to seek higher profits due to : Constant price, perfectly elastic demand, and normal profits in long run.

Step by step solution

01

Perfect Competition Definition 

It is a market where large number of buyers and sellers exchange homogenous goods at uniform prices, due to prevailing perfect information.

Entry and exit is easy in this market.

02

Price Concept 

Individual firms take up industry determined price.

Their demand curve is perfectly elastic & horizontal : demand responds infinitely to price change and infinite quantity can be sold at constant price only.

So, price can't be hiked for higher profit. As this would lead to loss of all customers.

03

Profit Concept 

Free entry and exit leads to firms earning only normal profits in long run.

Super normal profits imply more firms enter market. So, supply increases and price falls, which reduces extra profit.

Abnormal loss imply firms exit from market. So, supply decreases and price increases, which reduces loss.

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Most popular questions from this chapter

Look at Table 8.13. What would happen to the firm’s profits if the market price increases to $6 per pack of raspberries?

Explain how the profit-maximizing rule of setting P = MC leads a perfectly competitive market to be allocatively efficient.

Why will profits for firms in a perfectly competitive industry tend to vanish in the long run?

Productive efficiency and allocative efficiency are two concepts achieved in the long run in a perfectly competitive market. These are the two reasons why we call them “perfect.” How would you use these two concepts to analyze other market structures and label them “imperfect?”

1. A computer company produces affordable, easy-to-use home computer systems and has fixed costs of \(250. The marginal cost of producing computers is \)700 for the first computer, \(250 for the second, \)300 for the third, \(350 for the fourth, \)400 for the fifth, \(450 for the sixth, and \)500 for the seventh.

a. Create a table that shows the company’s output, total cost, marginal cost, average cost, variable cost, and average variable cost.

b. At what price is the zero-profit point? At what price is the shutdown point?

c. If the company sells the computers for \(500, is it making a profit or a loss? How big is the profit or loss? Sketch a graph with AC, MC, and AVC curves to illustrate your answer and show the profit or loss.

d. If the firm sells the computers for \)300, is it making a profit or a loss? How big is the profit or loss? Sketch a graph with AC, MC, and AVC curves to illustrate your answer and show the profit or loss.
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