Question 1

In the last 15 years, mobile phone prices have been dropping significantly while the technology and features offered in these phones has increased dramatically. Along with technology advancement and outsourcing the production of mobile phones to countries with low cost of labor such as China, which of these economic phenomena explains the reduction in price?

Accepted Answer

Competition among mobile phone manufacturers has increased as technology has advanced and production costs have decreased due to outsourcing. This competition drives prices down as companies strive to attract consumers by offering better technology at lower prices.

Question 2

Many entrepreneurs found great economic opportunities in selling mobile phones in the 1990s, but as more entrepreneurs enter the mobile market, the fewer economic the opportunities found. In other words, economic opportunities are exhausted because the additional supply of mobile phones forced down prices. What effect did this have on the profit margin of existing sellers of mobile phones?

Accepted Answer

The increased supply of mobile phones due to more entrepreneurs entering the market led to lower prices, which in turn decreased the profit margins of existing sellers.

Question 3

-Refer to Figure 8 -1. If the firm is producing 700 units,

Accepted Answer

If the firm is producing 700 units and the question suggests considering a change in output, it implies that the current output is not optimal for maximizing profit. Therefore, the firm should cut back its output to reach the profit-maximizing level.

Question 4

A perfectly competitive market is in long run equilibrium. At present there are 100 identical firms each producing 5,000 units of output. The prevailing market price is $20. Assume that each firm faces increasing marginal cost. Now suppose there is a sudden increase in demand for the industry's product which causes the price of the good to rise to $24. Which of the following describes the effect of this increase in demand on a typical firm in the industry?

Accepted Answer

In the short run, a typical firm in a perfectly competitive market will respond to an increase in price (due to increased demand) by increasing its output to maximize profits, leading to above-normal profits until new firms enter the market and equilibrium is restored.

Question 5

In a competitive market, earning an economic profit in the long run is extremely difficult. This difficulty is greatly seen in the Apple iPhone App market. The long run for this market is quite short due to:

Accepted Answer

The ease of entry to the market allows for many developers to create and submit apps to the Apple App Store, increasing competition and making it difficult for any single app to earn economic profits in the long run.

Question 6

A constant cost perfectly competitive market is in long run equilibrium. At present, there are 1,000 firms each producing 400 units of output. The price of the good is $60. Now suppose there is a sudden increase in demand for the industry's product which causes the price of the good to rise to $64. In the new long run equilibrium, how will the average total cost of producing the good compare to what it was before the price of the good rose?

Accepted Answer

In a constant cost perfectly competitive market, when demand increases and the market adjusts to a new long-run equilibrium, firms' average total costs remain unchanged. This is because input prices do not change as industry output changes, allowing firms to expand production without experiencing economies or diseconomies of scale.

Question 7

The assumption that there are no barriers to new firms entering the market or exiting a market guarantees that any excess profits will be eliminated.

Accepted Answer

In a perfectly competitive market, the absence of entry and exit barriers ensures that new firms can enter the market if existing firms are making excess profits, increasing competition and driving down prices and profits to normal levels.

Question 8

If a perfectly competitive industry has a downward sloping long -run supply curve, it suggests that the demand for the industry's product is decreasing over time.

Accepted Answer

A downward sloping long-run supply curve in a perfectly competitive industry suggests increasing returns to scale or input prices decreasing as industry output increases, not necessarily decreasing demand for the product.

Question 9

A perfectly competitive firm in an increasing -cost industry faces an upward sloping long -run demand curve.

Accepted Answer

In a perfectly competitive market, firms face a perfectly elastic (horizontal) demand curve, not an upward sloping one. The concept of increasing-cost industry affects the supply side, not the demand side, and relates to how costs change as industry output changes.

Question 10

In response to decreasing profitability of Egyptian apparel producers in the last 2 years due to economic conditions, businessman Alaa Arafa said to producers "The ball has to keep rolling even at a loss of profitability. Lose money but do not lose the market share," It is clear that Arafa was advising others to keep producing and not shut down to maintain their market share. In which of these cases should a producer ignore Arafa's advice and shut down?

Accepted Answer

When the average variable cost is higher than the market price, it means the firm cannot cover its variable costs, let alone any portion of its fixed costs. Continuing production in this scenario would lead to greater losses than shutting down.

Question 11

Assume that the LCD and plasma television sets industry is perfectly competitive. Suppose a producer develops a successful innovation that enables it to lower its cost of production. What happens in the short run and in the long run?

Accepted Answer

In a perfectly competitive market, innovations can lead to temporary profits for the innovating firm. However, as other firms adopt the same or similar innovations, the market price adjusts, and profits return to normal levels, eliminating the temporary gains.

Question 12

In early 2007, Pioneer and JVC, two Japanese electronics firms, each announced that their profits were going to be lower than expected because they had both had to cut prices for LCD and plasma television sets. Which of the following could explain why these firms did not simply raise their prices and increase their profits?

Accepted Answer

Intense competition often leads to price wars among firms in the same industry. In the case of Pioneer and JVC, their decision to cut prices on LCD and plasma TVs likely stemmed from a fear of losing market share to each other. Raising prices in such a competitive environment could lead to a significant loss of customers to competitors, which explains why they didn't simply increase their prices to boost profits.

Question 13

Writing in the New York Times on the technology boom of the late 1990s, Michael Lewis argues, "The sad truth, for investors, seems to be that most of the benefits of new technologies are passed right through to consumers free of charge." What does Lewis means by the benefits of new technology being "passed right through to consumers free of charge"?

Accepted Answer

The answer of Writing in the New York Times on...

Question 14

The market for Egyptian Ramadan lanterns has been penetrated by Chinese producers of the same commodity. These Chinese producers are capturing market share due to the lower price of their products. What is the factor that is helping Chinese producers keep their prices low?

Accepted Answer

Chinese producers are likely able to keep their prices low due to having a lower average total cost compared to Egyptian producers. This could be due to economies of scale, more efficient production processes, or lower labor costs, among other factors.

Question 15

If productive efficiency characterizes an industry, firms in that industry are using the best technology available to produce the goods.

Accepted Answer

The answer of If productive efficiency characterizes an industry, firms...

Quiz 8: Firms in Perfectly Competitive Markets