312PART FIVEFIRM BEHAVIOR AND THE ORGANIZATION OF INDUSTRYdemand lowers prices and leads to losses. But if firmscan freely enter and exit the market, then in the long runthe number of firms adjusts to drive the market back tothe zero-profit equilibrium.competitive market, p. 292average revenue, p. 294marginal revenue, p. 294sunk cost, p. 298Key Concepts1.What is meant by a competitive firm?2.Draw the cost curves for a typical firm. For a givenprice, explain how the firm chooses the level of outputthat maximizes profit.3.Under what conditions will a firm shut downtemporarily? Explain.4.Under what conditions will a firm exit a market?Explain.5.Does a firm’s price equal marginal cost in the short run,in the long run, or both? Explain.6.Does a firm’s price equal the minimum of average totalcost in the short run, in the long run, or both? Explain.7.Are market supply curves typically more elastic in theshort run or in the long run? Explain.
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