Question 1

A perfectly competitive firm will produce:

Accepted Answer

In the short run, a perfectly competitive firm will continue to produce as long as the price covers its average variable costs (AVC), even if it's not covering its total costs (ATC), to minimize losses. This is because, in the short run, some costs are fixed and cannot be avoided, so covering variable costs allows the firm to contribute to those fixed costs.

Question 2

A perfectly competitive industry with constant costs initially operates in long-run equilibrium. When demand increases, in the long run and the short run:

Accepted Answer

The answer of A perfectly competitive industry with constant costs...

Question 3

A perfectly competitive industry has 10 firms, each with an MC curve that can be expressed as MC = 5q, where q is the level of output for each firm. The minimum point of the AVC curve is $5. Which of the following equations would describe upward-sloping portion of the industry supply curve for the industry, where Q is the market quantity and P is the market price?

Accepted Answer

The answer of A perfectly competitive industry has 10 firms,...

Question 4

In the long run, each firm in a perfectly competitive industry will:

Accepted Answer

In a perfectly competitive market, firms are price takers and cannot influence the market price. Therefore, each firm will earn only enough revenue to cover its costs of production including opportunity costs. If a firm earns more than this in the short run, new firms will enter the market, increasing supply and driving down prices until each firm only covers its costs in the long run. Choices B, C, and D are not applicable in a perfectly competitive market.

Question 5

In the long run, all of the firms in a perfectly competitive industry will:

Accepted Answer

In the long run, firms in a perfectly competitive industry will produce at an output level at which average total cost equals marginal cost. This is because in a perfectly competitive market, there are no barriers to entry or exit, and profits are driven down to zero. Therefore, if a firm is earning above-normal profits in the short run, new firms will enter the market, increasing supply and driving down the price until all firms are earning zero economic profit in the long run. At this point, each firm will produce at the output level where price equals marginal cost and average total cost, as this is the level of output that minimizes costs and maximizes efficiency.

Question 6

In the short run, for a perfectly competitive firm, the portion of the MC curve at or above the shut-down price is also its:

Accepted Answer

The portion of the Marginal Cost (MC) curve that lies at or above the shutdown price represents the firm's short-run supply curve in perfect competition. This is because, in the short run, a perfectly competitive firm will produce where price equals marginal cost (P=MC) as long as the price is above the minimum average variable cost (shutdown condition).

Question 7

The horizontal sum of individual firms' MC curves is the:

Accepted Answer

The horizontal sum of individual firms' MC curves is the short-run industry supply curve. This curve shows the total quantity of a good or service that all the firms in the industry are willing and able to produce at each possible price level in the short run.

Question 8

If the long-run market supply curve for a perfectly competitive market is horizontal, then this industry exhibits _____ costs.

Accepted Answer

If the long-run market supply curve for a perfectly competitive market is horizontal, this indicates that all firms in the industry are experiencing constant costs. This means that regardless of the level of output produced, the cost of producing each unit remains the same. As a result, firms in this industry can supply any quantity of output at the same price, resulting in a horizontal supply curve.

Question 9

Bob runs a pedicure business in a perfectly competitive industry. He knows that he will break even if the price of pedicures is $15 but that he will have to shut down if the price is $11. If the market demand in the industry is P = 30 - (0.2)Q and the market supply is P = (0.2)Q, in the short run, Bob will:

Accepted Answer

Bob will break even if the price is $15, and the market price is $30. So, he will produce and just break even.

Question 10

In a perfectly competitive market, tastes and preferences lead to an increase in the demand for the good. Holding everything else constant, this will lead to an increase in price that will result in _____, which will _____, which will _____.

Accepted Answer

The answer of In a perfectly competitive market, tastes and...

Question 11

Use the following to answer questions: Figure: The Perfectly Competitive Firm II -(Figure: The Perfectly Competitive Firm II) Look at the figure The Perfectly Competitive Firm II. If this firm's MR curve is MR₁, the firm will maximize profit by producing _____ units of output, and its economic profit will be _____.

Accepted Answer

The profit-maximizing output is where MC=MR, which is Q₃. Economic profit is positive because at this output level, price (P) is greater than average total cost (ATC).

Question 12

In the short run, fixed costs:

Accepted Answer

Fixed costs remain constant in the short run, and while they do not directly impact a firm's profit level, they are an important consideration when making production decisions.

Question 13

Hank operates a perfectly competitive firm in the long run. For several periods the market price has been $20, and his break-even price is $22. Given the chance to change his fixed costs, Hank should:

Accepted Answer

Hank is making losses as his break-even price is $22 but the market price is only $20. Therefore, he should exit the industry. In the long run, firms that cannot cover their costs will exit the industry, allowing the remaining firms to earn a normal profit. Changing fixed costs will not help Hank cover his losses in the short run, as he cannot influence the market price as a perfect competitor. Waiting for the short-run period will not change the fact that he is making losses at the current market price.

Question 14

Use the following to answer questions: Figure: The Perfectly Competitive Firm II -(Figure: The Perfectly Competitive Firm II) Look at the figure The Perfectly Competitive Firm II. If this firm's MR curve is MR₂, then this firm's optimal output is _____ units of output and its economic profit will be _____.

Accepted Answer

The optimal output for this firm is where MR = MC, which corresponds to point Q on the graph. At this output level, the economic profit is negative because the ATC curve is above the price (or AR) curve. Therefore, the best choice is option B.

Question 15

A perfectly competitive industry with constant costs initially operates in long-run equilibrium. When demand increases:

Accepted Answer

In the short run, the increase in demand will lead to an increase in price and profits as firms try to meet the new level of demand. However, in the long run, new firms will enter the industry to take advantage of the higher profits, leading to an increase in supply and a fall in price. Eventually, the price will fall back to its original level and firms will again earn zero economic profit.

Quiz 11: Perfect Competition and the Supply Curve