Question 1

If perfectly competitive firms are maximizing their profit and are making an economic profit,the market ________ in a short-run equilibrium and ________ in a long-run equilibrium.

Accepted Answer

In a short-run equilibrium, perfectly competitive firms can make economic profits. However, in the long-run, economic profits attract new firms, increasing supply and driving down prices until economic profits are zero, indicating the market is not in a long-run equilibrium with economic profits.

Question 2

If perfectly competitive firms are making an economic profit,the economic profit

Accepted Answer

In a perfectly competitive market, economic profit earned by firms attracts more firms to enter the market, increasing the supply and decreasing the price until the economic profit becomes zero. This is because there are no barriers to entry or exit in a perfectly competitive market, and so any positive economic profit will lead to competition and a decrease in profit until normal profit is earned.

Question 3

In the long run,a perfectly competitive firm will

Accepted Answer

In the long run, there are no barriers to entry in a perfectly competitive market and firms can enter or exit freely. This means that if firms in the industry are earning positive economic profits, new firms will enter the market in search of those profits. As more firms enter, the supply of the product will increase, causing the market price to fall. As the price falls, the profit margin for all firms in the industry decreases, until eventually, all firms are earning zero economic profit. Therefore, in the long run, a perfectly competitive firm will make zero economic profit.

Question 4

If the technology associated with producing fiber-optic cable continues to advance,over time the cost of producing fiber-optic cable will

Accepted Answer

As the technology associated with producing fiber-optic cable advances, the cost of producing it will decrease, which reduces the cost of production to firms. This will lead to higher profits for firms that use the new technology, and in the long run, new firms will enter the market to take advantage of the higher profits.

Question 5

A market is initially in a long-run equilibrium and there is a permanent increase in demand.After the new long-run equilibrium is reached,there

Accepted Answer

In a market experiencing a permanent increase in demand, more firms will enter the market to take advantage of the higher demand and potential profits, leading to a new long-run equilibrium with more firms.

Question 6

If it does not shut down,a perfectly competitive firm produces where marginal cost is equal to the marginal revenue

Accepted Answer

In a perfectly competitive market, firms will always produce where marginal cost equals marginal revenue in order to maximize their profit. This is true both in the short run and the long run. In the short run, firms may continue to operate even if they are not making a profit because they have already incurred some fixed costs, but in the long run, firms will exit the market if they are not making a profit. It is not necessary for a firm to produce where price equals average variable cost, and it is not necessary for a firm to produce where price is greater than average total cost.

Question 7

When a firm adopts new technology,generally its

Accepted Answer

When a firm adopts new technology, it becomes more efficient and productive, resulting in a shift of its cost curves downward. This is because the firm will be able to produce more output with the same or lower input costs, leading to lower average costs of production.

Question 8

In the long run,new firms enter a perfectly competitive market when

Accepted Answer

In a perfectly competitive market, new firms are attracted to enter when existing firms are earning economic profits (profits above the normal return on investment). This is because economic profits signal the potential for profitable investment opportunities in the market.

Question 9

The rutabaga market is perfectly competitive.Research is published claiming that eating rutabagas leads to gaining weight and so the demand for rutabagas permanently decreases.The permanent decrease in demand results in a

Accepted Answer

The decrease in demand will lead to a lower equilibrium price in a perfectly competitive market. This will result in economic losses for rutabaga farmers, as their revenues will decrease. In the long run, some farmers may exit the market to avoid further losses. Therefore, option B is the correct answer. Option A is incorrect because the entry of new firms is not feasible in a market with economic losses. Option C is incorrect because higher prices are not expected in response to a decrease in demand. Option D is incorrect because economic losses will lead to exit from the market, not entry. Option E is incorrect because economic profits are not expected when demand permanently decreases.

Question 10

Technology reduces the average cost of production,so in the long run
i.perfectly competitive firms produce at a lower average cost.
ii.the market price of the good falls.
iii.firms with older plants either exit the market or adopt the new technology.

Accepted Answer

Technology reduces the average cost of production, leading to lower production costs for perfectly competitive firms (i), a decrease in market price due to increased supply or reduced production costs (ii), and a need for firms with outdated technology to either exit the market or adopt new technology to remain competitive (iii).

Question 11

Technological change

Accepted Answer

Technological change often involves the implementation of new equipment, software, or procedures to improve production efficiency, product quality, or both. This usually requires an investment in a new plant or retrofitting an existing one, which can be costly but may result in long-term cost savings and profitability.

Question 12

Suppose a perfectly competitive market is in long-run equilibrium with a price of $12.Then there is a permanent increase in demand.As a result,in the short run the market price ________ and in the long run the number of firms ________ and the price is ________ the price was in the short run.

Accepted Answer

In the short run, an increase in demand leads to higher prices due to the fixed number of firms. In the long run, the higher profits attract more firms into the market, increasing supply and thus lowering the price back towards the long-run equilibrium, which is lower than the short-run price peak.

Question 13

Suppose the cost of a CD is $20.As online retailers enter the market with new technology,the price of CDs ________,and traditional music stores find that ________.

Accepted Answer

The introduction of online retailers with new technology typically leads to a decrease in the price of CDs due to increased competition and lower distribution costs. Traditional music stores, with higher average variable costs (AVC) due to physical storefronts and inventory, may find that these costs exceed the new, lower price, leading them to exit the industry.

Question 14

In the long run,a perfectly competitive firm makes

Accepted Answer

In the long run, a perfectly competitive firm will make zero economic profit because of the free entry and exit of firms. If a firm is making a positive economic profit, it will attract new firms to enter the market, which will increase the supply and drive down the market price until the firm's economic profit is zero. Conversely, if a firm is making an economic loss, some firms will exit the market, decreasing supply and driving up the market price until the firm's economic profit is also zero.

Question 15

Technological change allows perfectly competitive firms to ________ and leads to ________.

Accepted Answer

Technological change allows firms to produce goods and services at a lower cost. This enables them to lower their prices or maintain their current prices while increasing their profit margins. Lower prices benefit consumers by increasing their purchasing power and providing them with access to a wider range of goods and services. Therefore, option A is the best choice.

Question 16

A permanent decrease in demand definitely

Accepted Answer

The answer of A permanent decrease in demand definitely
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Question 17

In a market undergoing technological change,firms that

Accepted Answer

Firms that adopt the new technology temporarily make an economic profit as they are able to produce more efficiently and/or offer new products/services. However, this may not be a long-term advantage as other firms may also adopt the technology and competition increases. Firms that do not adopt the new technology may fall behind and eventually experience a decrease in profits or even go out of business.

Question 18

In the long run,a perfectly competitive firm

Accepted Answer

In the long run, a perfectly competitive market will adjust and reach equilibrium where all firms make zero economic profit. This is because in a perfectly competitive market, there are no barriers to entry or exit and all firms have access to the same technology and resources. If a firm were to earn an economic profit, it would attract new entrants to the market, driving down prices and reducing the profit until it reaches zero. Similarly, if a firm incurs an economic loss, some firms will exit the market, reducing supply and causing prices to go up until all remaining firms earn zero economic profit. Therefore, in the long run, a perfectly competitive firm makes zero economic profit.

Question 19

The cranberry market is perfectly competitive.Reports that consuming cranberries can lead to improved health result in a permanent increase in the demand for cranberries and an immediate upward jump in the price of cranberries.As time passes,the price of cranberries ________ and the initial firms' economic ________.

Accepted Answer

In a perfectly competitive market, an increase in demand leads to a temporary rise in price and profits, attracting new firms. Over time, the entry of these new firms increases supply, which reduces the price and eliminates the initial economic profit, restoring normal profit levels.

Question 20

If perfectly competitive firms are making an economic profit,then

Accepted Answer

In a perfectly competitive market, economic profits attract new firms to enter the market. With the entry of new firms, the market supply increases, leading to a reduction in the price and thereby reducing the profit of firms already in the market. This process continues until firms earn just a normal profit, and the market is in long-run equilibrium. Therefore, if perfectly competitive firms are making an economic profit, new firms enter the market, and the equilibrium profit of the firms already in the market decreases.

Quiz 15: Perfect Competition

If perfectly competitive firms are maximizing their profit and are making an economic profit,the market in a short-run equilibrium and in a long-run equilibrium.