Question 1

Suppose that the current equilibrium price of silver is $20 per ounce. If silver is produced under conditions of perfect competition and the industry is in long-run equilibrium, the average total cost of producing silver:

Accepted Answer

In long-run equilibrium under perfect competition, the market price is equal to the minimum average total cost (ATC) of production. Therefore, if the current equilibrium price of silver is $20 per ounce, the average total cost of producing silver should also be $20 per ounce in order to remain in long-run equilibrium. Any lower cost would result in excess profits for firms and attract new entrants, increasing the supply and driving down the price. Any higher cost would result in losses for firms and lead to exit from the industry, decreasing the supply and driving up the price.

Question 2

Suppose that the marginal cost of producing cottonseed meal is $170 per ton. If the cottonseed oil industry is perfectly competitive and in long-run equilibrium, the average total cost of producing cottonseed oil:

Accepted Answer

In a perfectly competitive market in long-run equilibrium, firms produce where price equals marginal cost (MC) and average total cost (ATC), ensuring no economic profit. Thus, if the marginal cost is $170 per ton, the average total cost must also be $170 per ton to satisfy these conditions.

Question 3

During a recession, the price of restaurant meals falls by over 10 percent. The most likely cause is:

Accepted Answer

During a recession, consumers have less disposable income and are likely to reduce spending on non-essential items such as dining out. This decrease in demand for restaurant meals shifts the demand curve to the left, leading to a decrease in the price of restaurant meals.

Question 4

The existence of economic losses induces firms to:

Accepted Answer

Economic losses indicate that firms are not earning enough revenue to cover their costs, so they are incentivized to exit the industry to avoid further losses. This reduces the number of firms in the industry, shifting the market supply curve to the left, and ultimately increasing market price.

Question 5

Suppose there is an improvement in the technology of producing TVs and the production of TVs becomes an increasingly competitive industry. Assuming that the TV industry is initially in equilibrium, the long-run effect of this improvement is:

Accepted Answer

An improvement in technology will increase productivity and decrease the cost of production. As a result, the supply of TVs will increase, leading to a surplus in the short run. In order to clear the surplus and return to equilibrium, firms will lower prices. This decrease in price will continue in the long run as competition forces firms to keep prices low. Greater competition will also incentivize firms to increase production to maintain market share. Therefore, the long-run effect of this improvement will be lower TV prices and greater TV production.

Question 6

If the long-run market supply curve is perfectly elastic, an increase in demand will cause the final equilibrium to be at:

Accepted Answer

A perfectly elastic long-run market supply curve means that suppliers can produce any amount of goods at the same price. Therefore, an increase in demand will result in a higher output at the original price.

Question 7

Suppose cookie sales fall as consumers become more carbohydrate-conscious. If the cookie industry is a constant-cost, perfectly competitive industry, this decline in market demand will cause market supply to:

Accepted Answer

In a constant-cost, perfectly competitive industry, when demand falls, the market adjusts by reducing supply in the long run. This adjustment continues until the new equilibrium price equals the minimum average total cost, ensuring that firms in the industry are covering their costs but not making abnormal profits.

Question 8

Assume that the t-shirt industry is perfectly competitive. If the industry is in long-run equilibrium when the market price of t-shirts is $10:

Accepted Answer

In long-run equilibrium, firms in a perfectly competitive industry produce at the minimum point of their average total cost curve. Therefore, the minimum long-run average total cost is equal to the market price, which is $10 in this case. If the minimum long-run average total cost were greater than $10, firms would be making economic profits and new firms would enter the industry in the long run, driving down the market price. If the minimum long-run average total cost were less than $10, firms would be making losses and some firms would exit the industry, also driving down the market price in the long run. So, C is the correct answer as this represents long-run equilibrium in a perfectly competitive industry.

Question 9

Assume the smart watch industry is a perfectly competitive industry that uses a specialized input. If this industry experiences an increase in demand, we might expect that in the long run:

Accepted Answer

In a perfectly competitive industry, an increase in demand leads to higher output prices initially. Over time, to meet this increased demand, firms will demand more of the specialized input, driving up its price. As the industry adjusts, new firms may enter due to higher profits, increasing supply and potentially stabilizing output prices. However, the specialized input's price remains high due to sustained demand, leading to both input and output prices increasing in the long run.

Question 10

Refer to the graph shown, which depicts a perfectly competitive firm. If the price of the product is $3:

Accepted Answer

The answer of Refer to the graph shown, which depicts...

Question 11

Suppose the minimum possible price of constructing homes is $50 per square foot. As a result of a sharp drop in the demand for home construction, the equilibrium price of home construction falls to $40 per square foot. Assuming the home construction industry is perfectly competitive and there are no specialized inputs, firms will:

Accepted Answer

In a perfectly competitive market, if the price falls below the minimum possible price of production ($50 in this case), firms will incur losses and start to exit the industry. This reduction in supply will eventually lead to an increase in price, potentially back to the minimum sustainable level or above, hence the price will rise above $40 in the long run.

Question 12

Many fast-food restaurants have begun offering value meals with fruit or salad instead of French fries. If consumers find this idea attractive, the market demand for potatoes will most likely:

Accepted Answer

If consumers choose to opt for fruit or salad instead of French fries, the demand for potatoes will decrease, resulting in short-run losses for potato growers as they will need to find new markets or reduce supply. However, in the long run, potato growers may be able to adapt and find new markets for their products.

Question 13

Refer to the graph shown, which depicts a perfectly competitive firm. If the price of the product is $8 and the firm maximizes profit:

Accepted Answer

The answer of Refer to the graph shown, which depicts...

Question 14

Refer to the graph shown, which depicts a perfectly competitive firm. When the industry is in long-run competitive equilibrium:

Accepted Answer

The answer of Refer to the graph shown, which depicts...

Question 15

The existence of positive economic profits induces firms to:

Accepted Answer

Positive economic profits act as a signal for firms to enter an industry, as they see an opportunity for profit. This leads to an increase in the supply of goods, which shifts the market supply curve to the right. However, as the quantity supplied increases and the market becomes more competitive, the market price decreases. Therefore, firms enter the industry, which shifts the market supply curve to the right, but this ultimately leads to a decrease in market price. Hence, option D is the correct answer.

Question 16

The demand for clothing increases. As a result, the price of clothing increases above the minimum average cost of producing it. In the long run, if the clothing industry is perfectly competitive and is a constant-cost industry:

Accepted Answer

In a constant-cost industry, an increase in demand will lead to an increase in the quantity supplied in the long run, but the price will remain at the minimum average cost of production. This means that the price of clothing will not increase, but the supply will increase to meet the demand. Therefore, choice B is the best answer.

Question 17

Long-run competitive equilibrium requires:

Accepted Answer

In the long run, firms will enter or exit the industry until economic profits are driven to zero. Therefore, a long-run competitive equilibrium requires economic profits to be zero for all firms in the industry. Option A is incorrect because it is not necessary for average costs to be zero for all firms. Option B is incorrect because it is not feasible for all firms to set a price of zero in a competitive market. Option D is also incorrect as accounting profits can be positive while economic profits are zero.

Question 18

If the long-run market supply curve is perfectly elastic, a fall in demand will cause the final equilibrium to be at:

Accepted Answer

When the long-run market supply curve is perfectly elastic, it means that the supply can adjust to any level of demand at the same price. Therefore, a fall in demand will result in a lower output, but the price will remain unchanged.

Question 19

When the electronics retailer Circuit City closed its stores following the 2008 recession, the market supply of electronic goods:

Accepted Answer

When Circuit City closed its stores, it reduced the supply of electronic goods in the market. As a result, the supply curve shifted to the left, causing a decrease in market supply. However, the demand for electronic goods remained relatively stable. Therefore, the decrease in supply and stable demand led to a shortage of electronic goods in the market, causing the market price to rise.

Question 20

The long-run industry supply curve will be upward-sloping if:

Accepted Answer

The long-run industry supply curve will be upward-sloping if input prices increase with the level of output, as this implies that costs will rise as industry output expands, leading to higher prices needed to cover these costs.

Quiz 13: Perfect Competition

Suppose that the current equilibrium price of silver is $20 per ounce. If silver is produced under conditions of perfect competition and the industry is in long-run equilibrium, the average total cost of producing silver:

Suppose that the marginal cost of producing cottonseed meal is $170 per ton. If the cottonseed oil industry is perfectly competitive and in long-run equilibrium, the average total cost of producing cottonseed oil:

During a recession, the price of restaurant meals falls by over 10 percent. The most likely cause is:

The existence of economic losses induces firms to:

Suppose there is an improvement in the technology of producing TVs and the production of TVs becomes an increasingly competitive industry. Assuming that the TV industry is initially in equilibrium, the long-run effect of this improvement is:

If the long-run market supply curve is perfectly elastic, an increase in demand will cause the final equilibrium to be at:

Suppose cookie sales fall as consumers become more carbohydrate-conscious. If the cookie industry is a constant-cost, perfectly competitive industry, this decline in market demand will cause market supply to:

Assume that the t-shirt industry is perfectly competitive. If the industry is in long-run equilibrium when the market price of t-shirts is $10:

Assume the smart watch industry is a perfectly competitive industry that uses a specialized input. If this industry experiences an increase in demand, we might expect that in the long run:

Refer to the graph shown, which depicts a perfectly competitive firm. If the price of the product is $3:

Many fast-food restaurants have begun offering value meals with fruit or salad instead of French fries. If consumers find this idea attractive, the market demand for potatoes will most likely:

Refer to the graph shown, which depicts a perfectly competitive firm. If the price of the product is $8 and the firm maximizes profit:

Refer to the graph shown, which depicts a perfectly competitive firm. When the industry is in long-run competitive equilibrium:

The existence of positive economic profits induces firms to:

The demand for clothing increases. As a result, the price of clothing increases above the minimum average cost of producing it. In the long run, if the clothing industry is perfectly competitive and is a constant-cost industry:

Long-run competitive equilibrium requires:

If the long-run market supply curve is perfectly elastic, a fall in demand will cause the final equilibrium to be at:

When the electronics retailer Circuit City closed its stores following the 2008 recession, the market supply of electronic goods:

The long-run industry supply curve will be upward-sloping if: