Question 1

When firms in a competitive market have different costs, it is likely that

Accepted Answer

In a competitive market, firms will continue to enter until economic profits are zero. However, if firms have different costs, some firms will be able to produce at a lower cost than others and achieve positive economic profits. These profits will attract more firms to enter the market, increasing supply and driving down prices until profits are again reduced to zero. In the long run, some firms will still earn positive economic profits, but the industry as a whole will still be considered competitive.

Question 2

Figure 14-13
Suppose a firm in a competitive industry has the following cost curves: 
-Refer to Figure 14-13. If the price is $3.50 in the short run, what will happen in the long run?

Accepted Answer

At a price of $3.50, the firm will produce where MR=MC and will produce 1,500 units at a per unit cost of $4. In the short run, the firm will earn negative economic profits (total revenue will be less than total variable costs) and will continue to produce as long as price covers average variable costs. In the long run, if all firms in the industry are earning negative economic profits, some firms will exit the industry, decreasing supply and increasing price until economic profits are driven to zero. Therefore, individual firms will earn negative economic profits in the short run, which will cause some firms to exit the industry in the long run.

Question 3

Consider a competitive market with a large number of identical firms. The firms in this market do not use any resources that are available only in limited quantities. In this market, an increase in demand will

Accepted Answer

In a competitive market with many identical firms and no limited resources, an increase in demand can lead to a short-term price increase as firms adjust production. However, in the long run, the ease of entry and exit in the market and the absence of resource constraints mean that new firms can enter, or existing firms can expand production, increasing supply to meet the higher demand, thus bringing the price back to its original level.

Question 4

In the transition from the short run to the long run, the number of firms in a competitive industry is

Accepted Answer

In the long run, there are no fixed factors of production and firms have the flexibility to enter or exit the industry in response to changes in market conditions such as prices and profits. Therefore, the number of firms in a competitive industry is not fixed but able to adjust to market conditions.

Question 5

If all existing firms and all potential firms have the same cost curves, there are no inputs in limited quantities, and the market is characterized by free entry and exit, then the long-run market supply curve

Accepted Answer

In perfect competition with identical cost curves, the long-run equilibrium occurs when all firms are producing at minimum long-run average cost (LRAC). This means that the long-run market supply curve will be horizontal and equal to the minimum LRAC for each firm. Therefore, the correct choice is D.

Question 6

A competitive market is in long-run equilibrium. If demand increases, we can be certain that price will

Accepted Answer

An increase in demand will lead to an increase in price in the short run, as firms are not yet able to increase their output to meet the new level of demand. However, this will attract new firms to enter the industry, increasing the supply and ultimately leading to a decrease in price to reach the new long-run equilibrium. This is known as the "entry effect," as new firms enter the market to take advantage of the higher prices. Therefore, the correct answer is B.

Question 7

The long-run supply curve for a competitive industry

Accepted Answer

The answer of The long-run supply curve for a competitive...

Question 8

Figure 14-13
Suppose a firm in a competitive industry has the following cost curves: 
-Refer to Figure 14-13. If the price is $6 in the short run, what will happen in the long run?

Accepted Answer

At a price of $6, each firm in the industry will earn positive economic profits in the short run. This will attract other firms to enter the industry in the long run, increasing the supply and pushing the price down until it reaches the minimum point of the long-run average cost curve. At this point, each firm will earn zero economic profits, and there will be no incentive for further entry or exit.

Question 9

When entry and exit behavior of firms in an industry does not affect a firm's cost structure,

Accepted Answer

If the entry and exit behavior of firms in an industry does not affect a firm's cost structure, then the long-run market supply curve must be horizontal. This is because firms can enter or exit the industry without affecting the overall cost structure, so the market supply will remain constant regardless of changes in demand.

Question 10

Figure 14-13
Suppose a firm in a competitive industry has the following cost curves: 
-Refer to Figure 14-13. If the price is $2 in the short run, what will happen in the long run?

Accepted Answer

The answer of Figure 14-13
Suppose a firm in a competitive...

Question 11

A competitive market is in long-run equilibrium. If demand decreases, we can be certain that price will

Accepted Answer

If demand decreases in a competitive market, the quantity demanded at the current price will decrease. This will cause a surplus, leading firms to reduce prices to sell off the excess inventory, causing the price to fall in the short run. Depending on the profitability of the industry, all, some, or no firms may shut down in the long run, and some may exit the industry. This will lead to a decrease in supply, causing the market price to rise to reach the new long-run equilibrium. Therefore, in the short run, the price will fall, and in the long run, the price will rise to reach the new equilibrium. Option C is the best choice as it explains the short and long-run effects on price and the possibility of firms exiting the industry.

Question 12

Figure 14-13
Suppose a firm in a competitive industry has the following cost curves: 
-Refer to Figure 14-13. If the price is $4.50 in the short run, what will happen in the long run?

Accepted Answer

The answer of Figure 14-13
Suppose a firm in a competitive...

Question 13

Suppose that some firms in a competitive industry are earning zero economic profits, while others are experiencing losses. All else equal, in the long run, we would expect the number of firms in the industry to

Accepted Answer

If some firms are experiencing losses, they are likely to exit the market in the long run. This would decrease the number of firms in the industry, until the remaining firms earn zero economic profits.

Question 14

When a competitive market experiences an increase in demand that increases production costs for existing firms and potential new entrants, which of the following is most likely to arise?

Accepted Answer

The answer of When a competitive market experiences an increase...

Question 15

Suppose that firms in a competitive industry are earning positive economic profits. All else equal, in the long run, we would expect the number of firms in the industry to

Accepted Answer

The answer of Suppose that firms in a competitive industry...

Question 16

A long-run supply curve is flatter than a short-run supply curve because

Accepted Answer

In the long run, firms can enter and exit a market more easily than in the short run, allowing for a greater potential supply response to changes in price. This means that the quantity supplied can change more in the long run compared to the short run for the same change in price. Thus, the long-run supply curve is flatter than the short-run supply curve.

Question 17

When all firms and potential firms in a market have the same cost curves, the long-run equilibrium of a competitive market with free entry and exit will be characterized by firms

Accepted Answer

When all firms have the same cost curves, the market will be characterized by firms operating at the efficient scale in the long-run equilibrium. This is because in a competitive market with free entry and exit, firms will continue to enter until economic profits are driven down to zero. At the efficient scale, firms are producing output at the lowest possible average total cost, ensuring that resources are being used efficiently, and there is no excess capacity. Thus, in the long-run equilibrium, firms will be operating at the efficient scale, neither earning economic profits nor facing future losses.

Question 18

The long-run supply curve for a competitive industry may be upward sloping if

Accepted Answer

If some resources are available only in limited quantities, the long-run supply curve for a competitive industry may be upward sloping as production becomes more expensive due to the scarcity of these resources.

Question 19

In the long run,

Accepted Answer

In the long run, competitive firms are able to enter or exit the market in response to profits or losses. This leads to a situation where firms earn only normal profits, i.e. just enough to cover all their costs including opportunity costs of the resources used. So, in the long run, competitive firms' profits are zero.

Question 20

When some resources used in production are only available in limited quantities, it is likely that the long-run supply curve in a competitive market is

Accepted Answer

When resources used in production are limited, it typically leads to an increase in costs as output increases, which in turn causes the long-run supply curve in a competitive market to slope upward. This reflects the principle that scarcity of resources can lead to higher production costs, which are passed on in the form of higher prices.

Quiz 13: Firms in Competitive Markets