production, how will this affect the market?

8. A market in perfect competition is in long-run equilibrium. What happens to the market if labor unions

are able to increase wages for workers?

9. Productive efficiency and allocative efficiency are two concepts achieved in the long run in a perfectly

competitive market. These are the two reasons why we call them “perfect.” How would you use these two

concepts to analyze other market structures and label them “imperfect?”

10. Explain how the profit-maximizing rule of setting P = MC leads a perfectly competitive market to be

allocatively efficient.

Review Questions

11. A single firm in a perfectly competitive market is relatively small compared to the rest of the market. What

does this mean? How “small” is “small”?

12. What are the four basic assumptions of perfect competition? Explain in words what they imply for a

perfectly competitive firm.
212 8 • Critical Thinking Questions

13. What is a “price taker” firm?
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