Question 1

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?

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Question 2

Describe the difference between average revenue and marginal revenue. Why are both of these revenue measures important to a profit-maximising firm?

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Question 3

What are opportunity costs? How do explicit and implicit costs relate to opportunity costs?

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Question 4

Give two reasons why the long-run industry supply curve may slope upward. Use an example to demonstrate your reasons.

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Question 5

At its current level of production a profit-maximising firm in a competitive market receives R12.50 for each unit it produces and faces an average total cost of R10. At the market price of R12.50 per unit, the firm's marginal cost curve crosses the marginal revenue curve at an output level of 1 000 units. What is the firm's current profit? What is likely to occur in this market and why?

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Question 6

In long-run equilibrium in a competitive market, firms are operating at

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Question 7

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 8

a) The production function depicts a relationship between which two variables? Also, draw a production function that exhibits diminishing marginal product.
b) How would a production function that exhibits decreasing marginal product affect the shape of the total cost curve? Explain or draw a graph.
c) What effect, if any, does diminishing marginal product have on the shape of the marginal cost curve?

Accepted Answer

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Question 9

Use a graph to demonstrate the circumstances that would prevail in a perfectly competitive market where firms are experiencing economic losses. Identify costs, revenue, and the economic losses on your graph. Using your graph, determine whether an individual firm will shut down in the short run, or choose to remain in the market. Explain your answer.

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Question 10

A key difference between accountants and economists is their different treatment of the cost of capital. Does this cause an accountant's estimate of total costs to be higher or lower than an economist's estimate? Explain.

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Question 11

Jan van Rooyen owns a hotdog shop. Jan hires an economist who assesses the shape of the hotdog shop's average total cost (ATC) curve as a function of the number of hotdogs produced. The results indicate a U-shaped average total cost curve. Jan's economist explains that ATC is U-shaped for two reasons. The first is the existence of diminishing marginal product, which causes it to rise. What would be the second reason? Assume that the marginal cost curve is linear. (Hint: The second reason relates to average fixed cost)

Accepted Answer

The answer of Jan van Rooyen owns a hotdog shop....

Question 12

Use a graph to demonstrate the circumstances that would prevail in a competitive market where firms are earning economic profits. Can this scenario be maintained in the long run? Explain your answer.

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Question 13

If the long-run market supply curve for a good is perfectly elastic, an increase in the demand for that good will, in the long run, cause

Accepted Answer

When the long-run market supply curve for a good is perfectly elastic, it means that any increase in demand can be met by an increase in supply without affecting the price of the good. In this case, an increase in the demand for the good will induce new firms to enter the market to supply the additional demand, but the price of the good will not change. Thus, the number of firms in the market will increase, but the price of the good will remain the same. This is represented by choice A.

Question 14

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 adjust their production levels and to enter or exit the market. This means that the long-run supply curve is flatter because firms can respond more easily to changes in price. In the short run, some inputs cannot be varied (e.g. capital equipment) so firms are less flexible and the supply curve is steeper.

Quiz 6: Background to Supply: Firms in Competitive Markets