From this chapter we know that a profit maximizing competitive firm will set its price equal to the market price. Briefly describe why a profit maximizing competitive firm will not set its price above the market price. Also, describe why a profit maximizing competitive firm will not set its price below the market price.
What will be an ideal response?
If the competitive firm sets its price above the market price the quantity demanded of its product will fall to zero and thus profits will fall. At the same time, there is no reason for a competitive firm to lower its price below the market since it can sell as much as it wishes at the market price. By lowering its price, the firm reduces its revenue and thus reduces its profits.
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Study the graph. Suppose this nation starts with producing all military goods. It then decides to produce a mix of civilian and military goods represented by point B. What represents the costs in military goods given up?
What will be an ideal response?
Suppose Louisa starts to use Facebook in order to connect with her school friends. She connects with some, but not all of them are on Facebook. If all her friends start using Facebook, it would lead to _____
a. a network externality b. allocative efficiency c. a socially optimum equilibrium d. a negative externality