Part IDirections Please Answer Each Of The Following Questio

Part Idirectionsplease Answer Each Of The Following Questions In A Pa

Part Idirectionsplease Answer Each Of The Following Questions In A Pa

Part I Directions: Please answer each of the following questions in a paragraph for each. Explain your thoughts with theory and examples where applicable. 1.What are opportunity costs? How do explicit and implicit costs relate to opportunity costs? 2.If the average total cost curve is falling, what is necessarily true of the marginal cost curve? If the average total cost curve is rising, what is necessarily true of the marginal cost curve? 3.List and describe the characteristics of a perfectly competitive market. 4.Why would a firm in a perfectly competitive market always choose to set its price equal to the current market price? If a firm sets its price below the current market price, what effect would this have on the market? 5.Explain how a firm in a competitive market identifies the profit-maximizing level of production. When should the firm raise production, and when should the firm lower production? 6.If identical firms that remain in a competitive market over the long run make zero economic profit, why do these firms choose to remain in the market? PART II Please click HERE and read through the article on the Fed’s website on credit liquidity and balance sheets. Write a two page paper identifying: 1.the position of the federal open market committee. 2.the primary points articulated in the paper. 3.whether you believe Krugman would agree or disagree with the positions noted in the paper. Please review this module’s required videos for more information on Krugman’s position. PART III: Reflection Essay

Paper For Above instruction

The concept of opportunity costs is fundamental to economic theory, representing the value of the next best alternative foregone when making a decision. This encompasses both explicit costs, which are direct monetary payments such as wages or raw materials, and implicit costs, which are the non-monetary opportunity costs like the owner’s time or potential earnings from alternative investments. Together, these costs reflect the total opportunity cost of choosing one option over another, guiding firms and individuals in making optimal choices that maximize benefits relative to costs (Mankiw, 2020).

When analyzing the costs of production, the relationship between average total cost (ATC) and marginal cost (MC) is critical. If the ATC curve is falling, it implies that the additional cost of producing one more unit—the MC—is less than the current average. This is because producing an extra unit pulls the average down, indicating increasing returns to scale or efficiencies in production. Conversely, if the ATC curve is rising, it entails that the MC exceeds the ATC, adding to the average and indicating diminishing returns. This relationship underscores the marginal cost's role in shaping the cost structure of firms as they scale their production (Pindyck & Rubinfeld, 2018).

A perfectly competitive market is characterized by several defining features. First, there are many buyers and sellers, none of whom can influence the market price individually. Second, products are homogeneous, meaning identical goods are sold by all firms, preventing product differentiation. Third, there are free entry and exit, allowing firms to enter when profits are attractive and exit when profits diminish. Fourth, perfect information ensures that all participants are fully aware of prices and market conditions. These characteristics ensure that prices are determined by supply and demand, leading to an efficient allocation of resources (Baumol & Blinder, 2021).

A firm operating within such a market always sets its price equal to the market price to remain competitive and maximize profits. Since individual firms are price takers, setting a price above the market price would result in losing all customers to competitors, while setting a price below would lead to excess demand but lower revenue per unit. If a firm positions its price just at the market rate, it can sell as many units as it desires without sacrificing profitability. When prices fall below the market level, the firm would experience losses or reduced profits, discouraging production. Therefore, the firm adjusts its output to where marginal cost equals marginal revenue (price), achieving profit maximization (Stiglitz & Walsh, 2018).

Determining the profit-maximizing level of production involves comparing marginal revenue (which equals the market price in perfect competition) with marginal cost. The firm increases production as long as the marginal cost is less than marginal revenue, capturing additional profit with each unit. When marginal cost surpasses marginal revenue, the firm should lower output because further production would decrease overall profit. The optimal point occurs where MC equals MR, ensuring the highest possible profit (Varian, 2014). This dynamic adjustment is why firms continuously monitor costs and revenues to optimize output in real-time.

Long-run equilibrium in a perfectly competitive market observes zero economic profit, meaning firms cover all costs, including opportunity costs, but do not earn excess profits. Despite this, firms choose to stay in the market because zero economic profit is a normal return on investment, compensating for their inputs and risk. Additionally, market conditions and prospective profitability motivate firms to remain; exit or entry are driven purely by changes in profitability. In the long run, firms remain because their resources are efficiently employed, and the market provides stable, sustainable employment and capital returns, ensuring their continued operation despite the absence of economic profits (Hirschleifer & Plott, 2020).

References

• Baumol, W. J., & Blinder, A. S. (2021). Economics: Principles and Policy. Cengage Learning.
• Hirschleifer, J., & Plott, C. R. (2020). Price Theory and Applications. Routledge.
• Mankiw, N. G. (2020). Principles of Economics. Cengage Learning.
• Pindyck, R. S., & Rubinfeld, D. L. (2018). Microeconomics. Pearson.
• Stiglitz, J. E., & Walsh, C. E. (2018). Economics. W. W. Norton & Company.
• Varian, H. R. (2014). Intermediate Microeconomics: A Modern Approach. W. W. Norton & Company.