Question 1

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

If some resources used in production are only available in limited quantities, then as demand for the product increases and firms try to produce more of it, the cost of producing additional units will begin to rise due to the scarcity of these resources. This means that the long-run supply curve will likely be upward sloping, as firms will require higher prices to justify the increased production costs.

Question 2

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 means that firms can enter or exit the industry without affecting the price or cost of other firms in the market. This ensures that there are no barriers to entry or exit, and hence the market is perfectly competitive. In a perfectly competitive market, the long-run market supply curve must be horizontal as there are no additional costs for firms to enter or exit the market. This means that firms can increase or decrease production without affecting the market price, resulting in a constant supply curve.

Question 3

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

Accepted Answer

When firms in a competitive market have different costs, some firms will have lower costs and will be able to offer lower prices than their competitors. This will attract more customers and increase their market share. In the long run, other firms may exit the market or find ways to reduce their costs in order to compete. However, if some firms are unable to reduce their costs, then they may earn positive economic profits in the long run. This does not necessarily violate the conditions of a competitive market but suggests that there are differences in firm efficiency and cost structures. Therefore, choice D is the best answer.

Question 4

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 revenue below its average total cost, but above its average variable cost. This means that the firm will continue to operate in the short run, but will incur losses. In the long run, firms will have an incentive to exit the industry, which will decrease the supply and increase the price. As the price increases, firms that have exited may re-enter the industry, but only until zero economic profits are earned. Thus, the industry will reach a long-run equilibrium at a higher price than $3.50, where all firms earn zero economic profits.

Question 5

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 6

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

Accepted Answer

The answer of A competitive market is in long-run equilibrium....

Question 7

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

In the short-run, the decrease in demand will lead to a decrease in price. Since the market has a horizontal long-run supply curve, firms will continue to produce their current output in the short-run. However, the decrease in price will result in some firms earning a price that is below their average total cost, causing them to incur losses. In the short-run, firms may continue to operate at a loss if their price is above their variable cost, but they will ultimately shut down if they are unable to cover their fixed costs. Therefore, it is certain that at least some firms will produce at a price below their average total cost, putting them at risk of shutting down in the short-run.

Question 8

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

The answer of When a competitive market experiences an increase...

Question 9

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

Accepted Answer

If firms have different costs, then the long-run supply curve could potentially slope upwards as some firms may require higher prices to remain profitable. This is because in the long run, firms can adjust their production processes and enter or exit the market, so those with higher costs may choose to exit if prices are too low.

Question 10

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 11

In the long run the market supply

Accepted Answer

The answer of In the long run the market supply
...

Question 12

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

Accepted Answer

In the long run, firms have more flexibility to enter or exit a market as they can adjust their production capacity and make changes to their plant and equipment. As a result, the supply curve is flatter as firms can respond more easily to changes in market conditions without incurring significant costs. In the short run, firms are constrained by their fixed capital investments and cannot adjust their output levels as quickly or easily, leading to a steeper supply curve.

Question 13

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...

Question 14

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

Accepted Answer

In a competitive market, if demand decreases, there will be excess supply in the short run which will lead to a fall in price. In the long run, some firms will exit the market which will shift the supply curve to the left, leading to a rise in price to reach the new long-run equilibrium. However, not all firms will shut down in the short run, and the degree to which firms exit the industry will determine the final price in the new equilibrium. Therefore, option C is the correct choice as it covers all possible outcomes.

Question 15

The long-run supply curve for a competitive industry

Accepted Answer

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

Question 16

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, new firms can enter a competitive industry if there are profits to be made, and existing firms can exit if they are incurring losses. Therefore, the number of firms in a competitive industry is able to adjust to market conditions.

Question 17

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 18

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 19

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

In a competitive market with free entry and exit, firms will enter the market as long as they can make a profit. As more firms enter the market, the supply of the product will increase, driving down the price and reducing the profits of the firms. This process will continue until firms are only earning enough to cover their costs, resulting in small but positive economic profits. In the long run, all firms will be operating at the efficient scale, meaning that they are producing at the lowest possible average cost, given the technology available. This will result in a long-run equilibrium where firms are earning only enough to cover their costs, with no incentive for new firms to enter or existing firms to exit the market. Therefore, the correct choice is C, operating at the efficient scale.

Question 20

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, then as the industry expands and more firms enter to exploit those resources, the cost of obtaining those resources will increase, causing upward pressure on the long-run supply curve.

Quiz 14: Firms in Competitive Markets