Question 1

A competitive market is in long-run equilibrium. If demand decreases, we can be certain that price will

Accepted Answer

A decrease in demand will lead to excess supply in the short run, causing firms to lower their prices to maintain sales. This will lead to some firms exiting the industry due to lower profits, causing a decrease in supply and an increase in price in the long run. The extent to which firms exit the industry will depend on the degree of the demand decrease and the competitiveness of the market, hence all, some, or no firms may exit the industry. Therefore, option C is the most accurate choice. Options A and B are incorrect because they make extreme assumptions about the behavior of firms in response to decreased demand. Option D is incorrect because firms will exit the industry to reduce supply and increase price, not to maintain price.

Question 2

If all existing firms and all potential firms have the same cost curves, there are no inputs in limited quantities, and the market is characterized by free entry and exit, then the long-run market supply curve

Accepted Answer

In a perfectly competitive market with free entry and exit and firms having the same cost curves, the long-run market supply curve is determined by the minimum of long-run average cost for each firm. This is because in the long run, firms are able to adjust all inputs and achieve their minimum efficient scale, which corresponds to the point of minimum average cost. Therefore, the long-run market supply curve is horizontal at this minimum point of long-run average cost.

Question 3

When a competitive market experiences an increase in demand that increases production costs for existing firms and potential new entrants, which of the following is most likely to arise?

Accepted Answer

In a competitive market, if an increase in demand raises production costs, the long-run market supply curve will be upward sloping because higher costs mean that prices must rise to cover these costs, even as new firms enter the market.

Question 4

A market might have an upward-sloping long-run supply curve if

Accepted Answer

A market might have an upward-sloping long-run supply curve if firms have different costs. This means that some firms in the market have higher production costs than others. As the market price increases, some firms will be able to enter the market profitably, while others will exit the market because their costs are too high. As a result, the long-run supply curve will slope upward, reflecting the increasing costs of production as more firms enter the market. The other options (B, C, and D) do not lead to an upward-sloping long-run supply curve.

Question 5

A long-run supply curve is flatter than a short-run supply curve because

Accepted Answer

In the long run, firms can enter and exit a market more easily than in the short run because there are no fixed inputs. As a result, the long-run supply curve is flatter than the short-run supply curve, which implies that firms are more responsive to price changes in the long run.

Question 6

The long-run supply curve for a competitive industry

Accepted Answer

The answer of The long-run supply curve for a competitive...

Question 7

When entry and exit behavior of firms in an industry does not affect a firm's cost structure,

Accepted Answer

When entry and exit behavior of firms in an industry does not affect a firm's cost structure, it implies that firms can enter or exit the market without affecting the market price. This means that firms can enter or exit without changing the quantity supplied in the market, which leads to a horizontal long-run market supply curve.

Question 8

Figure 14-13
Suppose a firm in a competitive industry has the following cost curves: 
-Refer to Figure 14-13. If the price is $3.50 in the short run, what will happen in the long run?

Accepted Answer

At a price of $3.50, the firm is earning positive profits in the short run. However, in the long run, other firms will be enticed to enter the industry because of these profits. This will increase industry supply and lower the market price, causing individual firms to earn negative economic profits. Some firms will likely exit the industry in response to these losses. Therefore, the answer is C.

Question 9

In the long run the market supply

Accepted Answer

In the long run, the market supply curve could be upward sloping if the cost of production rises as new firms enter the market due to factors like increased demand for inputs, which raises their prices.

Question 10

When some resources used in production are only available in limited quantities, it is likely that the long-run supply curve in a competitive market is

Accepted Answer

When some resources used in production are only available in limited quantities, the cost of producing each additional unit increases as the available resources become scarcer. As a result, the long-run supply curve in a competitive market is likely to be upward sloping.

Question 11

A competitive market is in long-run equilibrium. If demand increases, we can be certain that price will

Accepted Answer

In the short run, an increase in demand will cause prices to rise. This attracts new firms to enter the industry, increasing supply, which will eventually cause prices to fall back to the new long-run equilibrium level.

Question 12

When all firms and potential firms in a market have the same cost curves, the long-run equilibrium of a competitive market with free entry and exit will be characterized by firms

Accepted Answer

When all firms and potential firms in a market have the same cost curves, the long-run equilibrium of a competitive market with free entry and exit will be characterized by firms operating at the efficient scale. At the efficient scale, firms are producing at the lowest possible cost, and there is no incentive for new firms to enter the market, as they would not be able to produce at a lower cost than existing firms. This results in zero economic profit in the long run.

Question 13

The long-run market supply curve in a competitive market will

Accepted Answer

In the long run, firms can enter or exit the market, and all inputs can be adjusted. This flexibility makes the long-run market supply curve typically more elastic than the short-run supply curve, where some inputs are fixed, limiting firms' ability to respond to price changes.

Question 14

When firms in a competitive market have different costs, it is likely that

Accepted Answer

In a competitive market, firms will continue to enter until economic profits are zero. However, if firms have different costs, some firms will be able to produce at a lower cost than others and achieve positive economic profits. These profits will attract more firms to enter the market, increasing supply and driving down prices until profits are again reduced to zero. In the long run, some firms will still earn positive economic profits, but the industry as a whole will still be considered competitive.

Question 15

Suppose a competitive market has a horizontal long-run supply curve and is in long-run equilibrium. If demand decreases, we can be certain that in the short-run,

Accepted Answer

Since the market has a horizontal long-run supply curve, firms are operating at their minimum efficient scale and are earning zero economic profits in the long-run equilibrium. A decrease in demand will cause a shift in the demand curve, leading to a temporary excess supply in the market. As a result, firms will reduce their output levels, causing their average total cost to increase due to diseconomies of scale. If the price falls below their average total cost, they will incur losses in the short-run and some firms may choose to shut down. Therefore, we can be certain that price will fall below average total cost for some firms in the short-run.

Question 16

The long-run supply curve for a competitive industry may be upward sloping if

Accepted Answer

If some resources are available only in limited quantities, the industry supply will be limited in the long run and the long-run supply curve will be upward sloping. This is because as the quantity produced increases, the cost of production increases due to the scarcity of resources. The other options (A, B, D) do not lead to an upward sloping long-run supply curve.

Question 17

Consider a competitive market with a large number of identical firms. The firms in this market do not use any resources that are available only in limited quantities. In this market, an increase in demand will

Accepted Answer

In a competitive market with many identical firms and no limited resources, an increase in demand can lead to a short-term price increase as firms adjust production. However, in the long run, the ease of entry and exit in the market and the absence of resource constraints mean that new firms can enter, or existing firms can expand production, increasing supply to meet the higher demand, thus bringing the price back to its original level.

Question 18

Figure 14-13
Suppose a firm in a competitive industry has the following cost curves: 
-Refer to Figure 14-13. If the price is $2 in the short run, what will happen in the long run?

Accepted Answer

The answer of Figure 14-13
Suppose a firm in a competitive...

Question 19

In the transition from the short run to the long run, the number of firms in a competitive industry is

Accepted Answer

In the long run, firms have the flexibility to enter or exit the market based on market conditions. Therefore, the number of firms in a competitive industry is able to adjust to market conditions in the long run.

Question 20

When new entrants into a competitive market have higher costs than existing firms,

Accepted Answer

The answer of When new entrants into a competitive market...

Quiz 14: Firms in Competitive Markets