Question 1

The table below presents the expected cost and demand schedules confronting Handy John, a chair manufacturer. Given this information, what will be the profit (or loss) of Handy John at the profit-maximizing price?

Accepted Answer

To maximize profit, Handy John should produce at the quantity where marginal cost is equal to marginal revenue, which is when output is 2 chairs. At this output level, the price should be set at $200, which is the price where the quantity demanded is 2. 
Total cost at output level 2 is $300 (2 chairs × $150 per chair), so total revenue at this output level is $500 (2 chairs × $250 per chair). 
Therefore, profit = total revenue - total cost = $500 - $300 = $200 profit.

Question 2

Tombstones are produced in a competitive price-searcher market. One producer, Rolling Stones, sells 20 tombstones a week at a price of $500 each. Its average total cost is $600. From this information, we can conclude

Accepted Answer

The answer of Tombstones are produced in a competitive price-searcher...

Question 3

Given the following price and output schedule, how many units should this price-searcher firm produce in order to maximize profits?

Accepted Answer

The answer of Given the following price and output schedule,...

Question 4

When a competitive price-searcher market is in long-run equilibrium, the firms will

Accepted Answer

The answer of When a competitive price-searcher market is in...

Question 5

Which of the following is true for firms that produce in markets where there are no barriers to entry?

Accepted Answer

In markets with no barriers to entry, firms can easily enter and exit the market in the long run, causing the market to reach a state of perfect competition, wherein economic profits are driven to zero. Therefore, firms will only make zero economic profits in the long run.

Question 6

Which of the following is true of a competitive price-searcher firm when the market is in a long-run equilibrium?

Accepted Answer

In long-run equilibrium, a competitive price-searcher firm sets its output where marginal revenue (MR) equals marginal cost (MC), and the price is greater than MC due to the firm's downward-sloping demand curve.

Question 7

Even when there are only a few firms in a market, the market can still be competitive as long as barriers to entry are low. Markets of this type are called

Accepted Answer

Contestable markets are those where there are only a few firms in the market, but the barriers to entry are low, allowing potential new firms to enter the market easily. This keeps the market competitive, as the existing firms must continue to offer competitive prices and quality in order to attract and retain customers. Monopolistic markets (A) are characterized by a single firm dominating the market, while price-taker markets (B) are those where the individual firms have no control over the market price. Convertible markets (D) are not a recognized type of market.

Question 8

As new firms enter a competitive price-searcher market, it can be expected that

Accepted Answer

With new firms entering the market, there will be increased competition, leading to a decrease in the pricing power of existing firms. This will likely result in lower profits for existing firms as they will need to lower prices to remain competitive. Therefore, the best choice is E, profits of existing firms will decrease.

Question 9

Because barriers to entry are low in competitive price-searcher markets, in the long run, a firm's price will be equal to

Accepted Answer

The answer of Because barriers to entry are low in...

Question 10

The fact that barriers to entry are low in competitive price-searcher markets means that if current firms are making economic losses,

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The answer of The fact that barriers to entry are...

Question 11

Which of the following is true when long-run equilibrium conditions are present in price-taker and competitive price-searcher markets?

Accepted Answer

In both price-taker and competitive price-searcher markets, long-run equilibrium conditions imply that P = ATC. This is because in the long run, firms will adjust their production to maximize profits, and in the absence of barriers to entry, new firms will enter the market and drive profits to zero. At this point, price (P) will equal average total cost (ATC) for all firms. Therefore, choice D is the correct answer.

Question 12

When a competitive price-searcher market is in long-run equilibrium, the firms in the market will earn

Accepted Answer

In a long-run competitive price-searcher market equilibrium, firms will earn zero economic profits, also known as normal profits. This means that the firms are earning enough revenue to cover all of their costs, including an opportunity cost of the resources used to produce the goods or services. However, they are not earning any excess profits above this level.

Question 13

In the long run, a competitive price-searcher firm will

Accepted Answer

A competitive price-searcher firm aims to maximize profits by setting the price above the marginal cost but below the average total cost. This means that they will produce a level of output where price equals average total cost, to avoid incurring losses. While the firm may produce a greater variety of goods than a perfectly competitive firm, it is not necessarily true in the long-run since it may face higher costs of production due to its research and development efforts. The firm may earn a normal profit in the long run but not necessarily an economic profit. The advertising budget may or may not lead to a loss, depending on its effectiveness in increasing the firm's market power and revenue.

Question 14

Given the following schedule, what price and output level would a profit-maximizing price searcher choose?

Accepted Answer

The answer of Given the following schedule, what price and...

Question 15

If firms in a competitive price-searcher market are currently experiencing economic profits, then over time,

Accepted Answer

When firms in a competitive price-searcher market are currently experiencing economic profits, it means that they are earning more than their opportunity cost. This will attract new firms to enter the market in search of the economic profits. As more firms enter the market, the demand for each firm's product will decrease, leading to a decrease in market price and a decrease in economic profits. This process continues until the economic profits reach zero, and firms are only earning normal profits. Therefore, choice A is the best answer.

Question 16

If the firms in a competitive price-searcher market are earning zero economic profit, this indicates that the

Accepted Answer

If the firms are earning zero economic profit, it means they are covering all their costs including opportunity costs. In this case, they are earning the normal rate of return, which is the minimum return necessary to keep them in the industry in the long-run. Therefore, the market is in long-run equilibrium.

Question 17

When a profit-maximizing firm in a competitive price-searcher market is in long-run equilibrium, price equals

Accepted Answer

In a competitive price-searcher market, firms have some control over the price they charge, but still face competition. In the long-run equilibrium, firms will set their price equal to the average total cost, which ensures that they are covering all their costs and earning zero economic profit. This is because if firms were earning positive profits, more firms would enter the market in the long-run, pushing down prices and reducing profits until they reach zero. Similarly, if firms were earning negative profits, some firms would exit the market, reducing supply and pushing up prices until profits also reach zero. Therefore, in the long-run equilibrium, firms in a competitive price-searcher market will charge the price equal to their average total cost, and earn zero economic profit.

Question 18

Many small U.S. cities are served by only one or two airlines. If a price increase in these markets allows other airlines to quickly and easily enter the market and compete, economists would call these markets

Accepted Answer

In contestable markets, there is no significant barrier to entry or exit for firms, and potential entrants can compete with existing firms easily and quickly. In this scenario, if a price increase in small U.S. cities allows other airlines to enter the market and compete, it suggests a lack of significant barriers to entry, making it a contestable market. Options B, C, and D are not appropriate because they do not accurately describe the characteristics of this market.

Question 19

A picture frame company operates in a competitive price-searcher market. Its short-run equilibrium price is $80 and its ATC is $65. It sells 100 picture frames a week. From this we can conclude

Accepted Answer

The answer of A picture frame company operates in a...

Question 20

When profits exist in a competitive price-searcher market,

Accepted Answer

In a competitive price-searcher market, profits attract rival firms to enter the market and compete for the profits. This increased competition will eventually lead to a decrease in prices and profits for all firms in the market. Therefore, the profits will not persist in the long run.

Quiz 10: Price-Searcher Markets With Low Entry Barriers