Question 1

If a purely competitive firm is producing at the MR = MC output level and earning an economic profit,then:

Accepted Answer

In a purely competitive market, if a firm is earning an economic profit, it signals to other potential firms that there are opportunities for profit in this market. This will attract new firms to enter the market, increasing supply and driving down prices until economic profits are eliminated and normal profits are achieved.

Question 2

Assume a purely competitive firm is maximizing profit at some output at which long-run average total cost is at a minimum.Then:

Accepted Answer

If a purely competitive firm is maximizing profit at the output where long-run average total cost is at a minimum, then it is producing at its efficient scale and achieving productive efficiency. This means that it is producing at the minimum average total cost for the given level of output. In a purely competitive market, this would also mean that the price is equal to the minimum average total cost, and the firm is earning zero economic profit. There is no tendency for the firm's industry to expand or contract because there are no economic profits to attract or repel entry or exit. Allocative efficiency is also being achieved because the price is equal to the marginal cost.

Question 3

A constant-cost industry is one in which:

Accepted Answer

In a constant-cost industry, resource prices remain unchanged as output is increased. This means that the costs of producing one unit of output remain the same regardless of the level of output being produced. This is usually the case in industries where the supply of resources is plentiful and easily accessible, and where there is no significant increase in demand for those resources as output increases.

Question 4

An increasing-cost industry is associated with:

Accepted Answer

An increasing-cost industry is one in which the cost per unit of output increases with the expansion of industry output in the long run. This is due to limited resources and increased competition for these resources. As a result, firms must pay higher prices for inputs, which increases their costs and thus their prices. Therefore, an increasing-cost industry is associated with an upsloping long-run supply curve.

Question 5

Which of the following distinguishes the short run from the long run in pure competition?

Accepted Answer

In pure competition, firms can enter and exit the market freely in the long run but not in the short run. This is because in the short run, firms are limited by fixed factors such as capital and technology, which means they cannot easily adjust their production levels. However, in the long run, firms can adjust their capital and technology to better compete in the industry, leading to more entry and exit in the market.

Question 6

When a purely competitive firm is in long-run equilibrium:

Accepted Answer

In long-run equilibrium for a purely competitive firm, price equals marginal cost. This is because in the long run, firms are able to adjust their inputs and outputs to minimize their costs and achieve maximum efficiency. At this point, there is no incentive for firms to enter or exit the market, and price is equal to the minimum average total cost, which is also equal to the marginal cost. Therefore, choice B is the correct answer.

Question 7

Which of the following statements is correct?

Accepted Answer

In a purely competitive increasing-cost industry, as the demand for the product increases, the price will rise, causing existing firms to expand production and new firms to enter the market. This will drive up the price of the resources used in production, resulting in higher costs for each additional unit of output. Thus, the long-run supply curve for this industry will be upsloping.

Question 8

Assume a purely competitive increasing-cost industry is initially in long-run equilibrium and that an increase in consumer demand occurs.After all economic adjustments have been completed,product price will be:

Accepted Answer

An increase in consumer demand will result in an increase in market price and quantity demanded in the short run. In the long run, firms will enter the industry to take advantage of the higher price, causing an increase in market supply and a reduction in the price. However, since this is an increasing-cost industry, the entry of new firms will lead to higher costs of production, causing the long-run market supply curve to be upward-sloping. As a result, the final equilibrium price will be higher than the original long-run equilibrium price, but the total output will also be larger than originally.

Question 9

Which of the following is true concerning purely competitive industries?

Accepted Answer

In the short run, firms in a purely competitive industry may earn economic profits or incur economic losses due to factors such as changes in input prices or fluctuations in demand. However, in the long run, firms will earn only normal profits as new firms enter the market, increasing competition and driving down prices and profits.

Question 10

Suppose a purely competitive,increasing-cost industry is in long-run equilibrium.Now assume that a decrease in consumer demand occurs.After all resulting adjustments have been completed,the new equilibrium price:

Accepted Answer

In a purely competitive, increasing-cost industry, a decrease in consumer demand leads to a lower equilibrium price and industry output as firms reduce production in response to decreased demand, eventually reaching a new equilibrium with lower price and output.

Question 11

We would expect an industry to expand if firms in that industry are:

Accepted Answer

If firms in an industry are earning economic profits, it indicates that they are generating revenue that exceeds their total costs, including both accounting costs and opportunity costs. This creates an incentive for other firms to enter the market, which expands the industry.

Question 12

Long-run competitive equilibrium:

Accepted Answer

In the long-run competitive equilibrium, firms produce at the minimum point on their average cost curve and earn only normal profits. This means that economic profits are zero, and prices are equal to marginal costs. Therefore, choice D is correct.

Question 13

A constant-cost industry is one in which:

Accepted Answer

In a constant-cost industry, the cost per unit of production remains constant, regardless of the level of output. This means that if 100 units can be produced for $100, then the cost per unit remains the same for larger production quantities, such as 150 for $150 and 200 for $200. This distinguishes a constant-cost industry from economies of scale, in which the cost per unit decreases as the level of output increases.

Question 14

A purely competitive firm:

Accepted Answer

In a purely competitive market, firms can earn economic profits in the short run due to varying demand and costs. However, in the long run, the entry of new firms into the market eliminates these economic profits, leading to only normal profits being earned. This is because the ease of entry and exit in such markets ensures that any economic profit attracts new entrants, increasing supply and driving prices down until only normal profits are possible.

Question 15

In a purely competitive industry:

Accepted Answer

In a purely competitive industry, firms may experience economic profits in the short run due to favorable market conditions or efficiencies. However, in the long run, the entry of new firms attracted by these profits will increase supply, drive down prices, and eliminate economic profits, leading to a state of normal profit where total revenue equals total costs.

Question 16

Assume a purely competitive,increasing-cost industry is in long-run equilibrium.If a decline in demand occurs,firms will:

Accepted Answer

In a purely competitive, increasing-cost industry in long-run equilibrium, firms are earning only a normal profit. A decline in demand will result in firms earning losses. As a result, some firms will leave the industry, which will reduce the output and increase the price in the short run. However, in the long run, the industry supply curve will shift to the left, resulting in both price and output declining until the remaining firms are earning only a normal profit again. Therefore, the correct answer is D.

Question 17

Which of the following statements is correct?

Accepted Answer

Economic profits are a signal that an industry has high demand and potential for profitability, which encourages firms to enter and increase supply. On the other hand, losses indicate low demand and profitability, which encourages firms to exit and reduce supply. Therefore, Option A is the correct statement. Option B is incorrect because it contradicts the concept of economic profits. Option C is also incorrect because profits and losses do have a significant impact on the growth or decline of an industry. Option D is partially correct because normal profits will maintain the industry size, but it will not necessarily cause expansion.

Question 18

The primary force encouraging the entry of new firms into a purely competitive industry is:

Accepted Answer

Economic profits earned by firms already in the industry serve as a signal to potential entrants that there are opportunities for profitable outcomes in the industry. This will encourage new firms to enter the market, which will increase competition and potentially drive down prices.

Question 19

Which of the following will not hold true for a competitive firm in long-run equilibrium?

Accepted Answer

In long-run equilibrium, the price (P) will be equal to the minimum average total cost (ATC) and the minimum efficient scale of production. This means that the firm will be producing at its lowest possible cost and will earn normal profits. However, in the long run, the average fixed cost (AFC) will approach zero, therefore P cannot equal AFC in the long run. Therefore, option A will not hold true in the long-run equilibrium for a competitive firm. B, C, and D will hold true.

Question 20

Suppose a firm in a purely competitive market discovers that the price of its product is above its minimum AVC point but everywhere below ATC.Given this,the firm:

Accepted Answer

The firm should continue producing in the short run because the price is above the minimum AVC point, allowing the firm to cover its variable costs and some of its fixed costs. However, since the price is below the ATC, the firm is still incurring losses. Therefore, in the long run, the firm should leave the industry if the situation persists, as it cannot continue to sustain losses indefinitely.

Quiz 11: Pure Competition in the Long Run

If a purely competitive firm is producing at the MR = MC output level and earning an economic profit,then:

Assume a purely competitive firm is maximizing profit at some output at which long-run average total cost is at a minimum.Then:

A constant-cost industry is one in which:

An increasing-cost industry is associated with:

Which of the following distinguishes the short run from the long run in pure competition?

When a purely competitive firm is in long-run equilibrium:

Which of the following statements is correct?

Assume a purely competitive increasing-cost industry is initially in long-run equilibrium and that an increase in consumer demand occurs.After all economic adjustments have been completed,product price will be:

Which of the following is true concerning purely competitive industries?

Suppose a purely competitive,increasing-cost industry is in long-run equilibrium.Now assume that a decrease in consumer demand occurs.After all resulting adjustments have been completed,the new equilibrium price:

We would expect an industry to expand if firms in that industry are:

Long-run competitive equilibrium:

A constant-cost industry is one in which:

A purely competitive firm:

In a purely competitive industry:

Assume a purely competitive,increasing-cost industry is in long-run equilibrium.If a decline in demand occurs,firms will:

Which of the following statements is correct?

The primary force encouraging the entry of new firms into a purely competitive industry is:

Which of the following will not hold true for a competitive firm in long-run equilibrium?

Suppose a firm in a purely competitive market discovers that the price of its product is above its minimum AVC point but everywhere below ATC.Given this,the firm: