ECON 356

In Class Exercise Eleven - The Model of Perfect Competition

1.  What does a "normal rate of return" mean?

2.  What are the four conditions (assumptions) of the model of perfect competition?

3.  Given that the price of your good is greater than your average variable cost, how do you find your profit maximizing or loss minimizing level of output?  Explain.

4.  What is the short run shut down decision?  Explain.

5.  Derive the short run supply curve for a firm - graphically and in words.  Explain.

6.  Graph the short run competitive equilibrium with zero economic profit (in the model of perfect competition) for the firm.  You need MR = P = AR, MC, and ATC.

7.  In the long run, if the firms in an industry are making an economic profit -- what will happen in this industry?  Explain how and why the industry will return to competitive equilibrium - use a graph and words.

8.  Why is the long run competitive equilibrium considered "efficient" in this model?  Define efficiency in your answer.