I. TRUEORFALSE.Explain why it is true or why it is false. thank you!

for reference:

Characteristics of the Perfect Competition

There are many buyers and sellers in the market - One firm in a perfectly competitive market produces only a negligible amount of the total quantity of the commodity provided in the market. If any one firm decides to produce and sell more, this decision does not substantially alter market conditions.

Each firm in the market produces identical products - All firms produce a standardized or homogenous commodity, which means the commodity produced by one firm is no different from a commodity produced by any other firm.

Buyers and sellers have perfect information - The good's price and quality are known to all buyers and sellers.

There is free entry into and exit from the market - There are no barriers to entry in a perfect competition. Therefore, new firms can easily establish themselves in the market. Existing firms can also easily exit the market. The assumption of free entry and exit simply implies that additional firms can enter the market if economic profits are being earned, and firms are free to leave the market if they are sustaining losses.

Being a Price Taker in the Perfectly Competitive Market

Each firm in a perfect competition is a price taker. When a firm is a price taker, price is established through supply and demand in the market. The perfectly competitive firm then sells its product at the market-established price. The firm cannot set the price. Under these conditions, a firm can only determine the output they must produce to maximize profits, and what inputs to use to minimize costs.

Because there are many firms in the market selling the same product, the consumers see the products of all firms as perfect substitutes. Because there is perfect information, consumers know the quality and price of each firm's product. If one firm charged a slightly higher price than the other firms, consumers would not shop at that firm but instead purchase from a firm charging a lower price. On the other hand, firms won't want to charge a price lower than the market price, because it would mean lower revenue and profit.

Advantages of Perfect Competition

Because there is perfect knowledge, there is no information failure and knowledge is shared evenly between all participants.

There are no barriers to entry, so existing firms cannot derive any monopoly power.

Only normal profits are made, so producers just cover their opportunity cost.

There is no need to spend money on advertising, because there is perfect knowledge and firms can sell all they produce. In addition, selling unbranded goods makes it hard to construct an effective advertising campaign.

Disadvantages of Perfect Competition

Firms do not have an incentive to innovate, or spend on research and development because their products can be easily copied by other firms.

Since the firms produce the same product, there is less variety.

Firms do not enjoy economies of scale (fall in the long run average total costs because of an increased scale of production). If they did, only a few large firms would remain in the industry.

Short Run and Long Run Profits Profit-maximizing Level of Output

The profits of the firm have three (3) possibilities: o P > ATC. In this case the firm makes supernormal profits. o P = ATC. In this case the firm breaks even, and the firm makes normal profits. o P < ATC. In this case the firm suffers a loss, because the price cannot cover the average costs. *P - Price; ATC - Average Total Cost

Leaving the Industry in the Short Run:

Shutdown is the short-run decision not to produce anything because of market conditions. Exit is the long-run decision to leave the market. A firm that shuts down temporarily must still pay its fixed costs. A firm that exits the market does NOT have to pay any costs at all, fixed or variable. The firm shuts down is the revenue it gets from producing is less than the variable cost of production. It chooses to shut down under three (3) conditions:

o TR < VC

o TR/Q < VC /Q

o P < AVC

*TR - Total Revenue; VC- Variable Costs, AVC - Average Variable Costs

Long Run Decisions

In the long run, outsider firms are attracted to the industry if the firms are making supernormal profits. This is because there are no barriers to entry and because there is perfect knowledge. The effect of this entry into the industry is to shift the industry supply curve to the right, which drives down prices until all supernormal profits are exhausted. If the firms are making losses, they will leave the market as there are no exit barriers, and this will shift the industry supply to the left, which raises price and enables those left in the market to have normal profits.

Economic profit / supernormal profit is based on all the production costs; therefore, zero economic profit represents a normal rate of return for your business. If the economic profit is greater than zero, the business is earning more than the normal return. This profit attracts other firms to enter the market. Similarly, if economic losses exist, firms leave the market. In the long run, profit ultimately equals zero.

Zero economic profit means that price equals average total cost.

The Long Run Equilibrium

The usual description of the long run equilibrium is as follows:

o The quantity of the product supplied in the market equals the quantity demanded by all consumers.

o Each firm in the market maximizes its profit, given the prevailing market price.

o Each firm in the market earns zero economic profit (normal profit) so there is no incentive for other firms to enter the market.

Profit maximization depends of producing a given quantity of output at the lowest possible cost. The long run equilibrium requires zero economic profit. Firms ultimately produce the output level associated with minimum long-run average total cost.

1.Ifafirm inaperfectlycompetitivemarket decides to producemore,theprices

will go up.

2.Inaperfectcompetition,allfirms produce thesameproduct.

3.Only the buyersknow the qualityofgoodsinaperfectlycompetitivemarket.

4.There isonlyone(1) firm thatcansetthe price inaperfectlycompetitivemarket.

5.Afirm in aperfectlycompetitivemarket cannotsetits ownoutput.

6.The productsintheperfectlycompetitivemarketaresubstitutes foreachother.

7. Existing firms have more power than new entrants in a perfectly competitivemarket.

8.Firms inaperfectlycompetitivemarket earnsupernormalprofits inthelongrun.

9.It is advisableforfirms inaperfectlycompetitivemarkettoadvertise.

10.Productshavemorevariety andaremore innovative underperfectcompetition.

11.Ifprice islowerthanaverage totalcost, thefirmearns supernormalprofits.

12.Ifafirm shutsdowntemporarily,itdoesnot payforany costs.

13. A firm should shut down if the revenue they get is less than the average fixedcost.

14. When firms enter the market in a perfectly competitive industry, the supplycurve shifts tothe right.

15.Zeroeconomicprofit meanstheprice equalsaverage variablecost.