Question 1

Suppose that the corn market is purely competitive. If the corn farmers are currently earning negative economic profits, then we would expect that in the long run the market's

Accepted Answer

In a purely competitive market, if firms are earning negative economic profits, some firms will exit the market in the long run. This will decrease the market supply, causing the supply curve to shift to the left.

Question 2

The long-run supply curve under pure competition is derived by observing what happens to market price and quantity when market

Accepted Answer

The long-run supply curve under pure competition is derived by observing changes in market demand and the resulting adjustments in the market, as firms enter or exit the industry until economic profits are zero, leading to a new equilibrium.

Question 3

Which of the following statements about pure competition in the long run is not true?

Accepted Answer

In pure competition, the long-run adjustment happens through shifts in the industry supply curve, not the industry demand curve. The demand curve facing the representative firm in the industry is perfectly elastic, so changes in demand do not affect the firm's output or price in the long run.

Question 4

The long-run supply curve under pure competition will be

Accepted Answer

In the long run, firms can enter or exit the industry, so the supply curve will shift until the industry is in long-run equilibrium. In a decreasing-cost industry, the long-run supply curve will be downward-sloping because as the industry expands, the average cost of production will decrease, and firms will be willing to supply more output at a lower price. In an increasing-cost industry, the long-run supply curve will be upward-sloping because as the industry expands, the average cost of production will increase, and firms will be willing to supply less output at a higher price.

Question 5

In pure competition, if the market price of the product is higher than the minimum average cost of the firms, then

Accepted Answer

If the market price of the product is higher than the minimum average cost of the firms, it indicates that there are economic profits to be made in the industry. This will attract new firms to enter the industry in the long run, which will increase the industry supply. The increase in supply will eventually drive down the market price and reduce the economic profits of the firms, but in the short run, more firms will enter the industry.

Question 6

All of the following statements apply to a purely competitive market in the long run, except

Accepted Answer

In the long run of a purely competitive market, all inputs are variable in quantity, firms can expand their plant capacities, and firms may enter or leave the industry. However, total fixed costs are not constant in the long run and can change as a result of changes in input prices or technological advances.

Question 7

If a purely competitive firm is facing a situation where the price of its product is lower than the average cost, then all of the following apply, except

Accepted Answer

In a purely competitive market, if firms are experiencing losses (price < average cost), other firms will not want to enter the industry because there are no positive economic profits to attract them.

Question 8

Assume the market for ball bearings is purely competitive. Currently, each of the firms in this market is earning positive economic profits. In the long run, as adjustments occur in the industry, we can expect the market price of ball bearings to

Accepted Answer

In the long run, new firms will likely enter the market to take advantage of the positive economic profits, increasing the supply of ball bearings and driving down the market price. This decrease in market price will lead to individual firms' profits decreasing as well, as they will now have to sell their ball bearings at a lower price. Therefore, the correct choice is D.

Question 9

If firms are losing money in a purely competitive industry, then the long-run adjustments in this situation will cause the market supply to

Accepted Answer

In a purely competitive industry, if firms are losing money in the short-run, some firms may leave the industry as a result of losses. This will cause a decrease in market supply, which will cause the price to increase until it reaches the minimum of the representative firm's long-run average cost curve. At this point, all firms in the industry will earn zero economic profits. Therefore, the representative firm's profits will increase in the long-run.

Question 10

Which of the following is not an assumption that we make in analyzing pure competition in the long run?

Accepted Answer

In the long run, firms in a purely competitive market earn normal profits (zero economic profits), but profits are still relevant as they influence firm behavior and market dynamics.

Question 11

Which of the following is not a factor that automatically pushes firms in pure competition to earn only normal profits in the long run?

Accepted Answer

Changes in market demand do not automatically push firms to earn only normal profits; they can lead to shifts in prices and profits, but the entry and exit of firms and adjustments in plant size are the mechanisms that drive firms to normal profits in the long run.

Question 12

Which of the following is true of normal profits?

Accepted Answer

Normal profits are the minimum level of profit needed for a firm to remain competitive in the industry in the long run, covering opportunity costs and ensuring the firm continues operations.

Question 13

If the representative firm in a purely competitive industry is in short-run equilibrium and, at its current output level, its marginal cost exceeds its average total cost, then we can conclude that

Accepted Answer

When marginal cost exceeds average total cost, the firm is making an economic profit, which attracts new firms to enter the industry in the long run.

Question 14

The long-run supply curve for a purely competitive industry would be horizontal when

Accepted Answer

In a purely competitive industry, the long-run supply curve is horizontal (perfectly elastic) when changes in demand do not affect resource prices, indicating constant costs in the industry.

Question 15

If a purely competitive firm is currently facing a situation where the price of its product is lower than the average variable cost, but it believes that the market demand for its product will increase soon, then

Accepted Answer

If the price of the product is lower than the average variable cost, the firm will incur losses in the short run. Therefore, the firm will shut down in the short run if it cannot cover its variable costs. However, if the firm believes that the market demand for its product will increase soon and lead to a higher product price, it may stay in the industry in the long run. In the short run, the firm will still shut down, but it will re-enter the market when the price goes up to cover at least its average total cost. Therefore, the best choice is D.

Question 16

If firms enter a purely competitive industry, then in the long run this change will shift the industry

Accepted Answer

In a purely competitive industry, the entry of new firms increases the market supply, shifting the industry supply curve to the right. This increased supply leads to a lower market price, causing the individual firm's demand curve, which is perfectly elastic, to shift down.

Question 17

The representative firm in a purely competitive industry

Accepted Answer

In the long run, a purely competitive industry offers no barriers to entry, so new firms will enter if there are economic profits, driving down prices and reducing individual firms' profits to zero. Therefore, the representative firm in a purely competitive industry will earn zero economic profit in the long run.

Question 18

The long-run supply curve would be perfectly elastic when

Accepted Answer

A perfectly elastic supply curve means that the quantity supplied can increase or decrease indefinitely without affecting the price of the product. Therefore, an increase in demand would not cause a change in product price, as there will always be enough supply to meet any increase in demand.

Question 19

Assume that the market for corn is purely competitive. Currently, firms growing corn are suffering economic losses. In the long run, we can expect

Accepted Answer

In a purely competitive market, if firms are suffering losses, some will exit the market, reducing supply and causing the market price to rise until firms break even.

Question 20

Assume that the market for soybeans is purely competitive. Currently, firms growing soybeans are earning positive economic profits. In the long run, we can expect

Accepted Answer

In the long run, when firms in a purely competitive market are earning positive economic profits, new firms will enter the market attracted by the profits. This will increase the supply of soybeans, causing the market price of soybeans to fall. Therefore, choice A is the correct answer. The entry of new firms will lead to an increase in competition, which will squeeze the profits of existing firms. Some firms may exit the market to avoid losses, but this will have the effect of increasing the market share and profits of the remaining firms. Ultimately, in the long run, the market price of soybeans will adjust to the cost of production and the level of demand, so that economic profits are zero.

Quiz 11: Pure Competition in the Long Run