Question 1

The long-run supply curve in a constant-cost industry is linear and:
A) upward-sloping.
B) downward-sloping.
C) horizontal.
D) vertical.
E) could have any constant slope.

Accepted Answer

In a constant-cost industry, the long-run supply curve is horizontal as increases in demand do not affect the cost of production for firms. Therefore, they can increase output without facing higher costs, resulting in a flat and constant supply curve.

Question 2

Following Example 8.8 in the book, the long-run supply of rental housing in most U.S. communities is more inelastic than the long-run supply of owner-occupied housing. Why?
A) Local rental housing regulations
B) Limited demand for rental housing
C) Limitations on the urban land available for rental housing
D) A and C above are correct

Accepted Answer

Local rental housing regulations and limitations on the urban land available for rental housing can make it more difficult and costly to build new rental housing units in most U.S. communities. This leads to a more inelastic supply of rental housing in the long run compared to owner-occupied housing, which can be more easily built in new areas with more available land. Limited demand for rental housing is not a major factor in this difference in elasticity of supply.

Question 3

The long-run cost function for LeAnn's telecommunication firm is:  A local telecommunication tax of $0.01 has been implemented for each unit LeAnn sells. This implies the marginal cost function becomes:  If LeAnn can sell all the units she produces at the market price of $0.70, calculate LeAnn's optimal output before and after the tax. What effect did the tax have on LeAnn's output level? How did LeAnn's profits change?

Accepted Answer

The answer of The long-run cost function for LeAnn's telecommunication...

Question 4

In the long-run equilibrium of a competitive market, the market supply and demand are:
Supply: P = 30 + 0.50Q
Demand: P = 100 - 1.5Q,
where P is dollars per unit and Q is rate of production and sales in hundreds of units per day. A typical firm in this market has a marginal cost of production expressed as:
MC = 3.0 + 15q.
a. Determine the market equilibrium rate of sales and price.
b. Determine the rate of sales by the typical firm.
c. Determine the economic rent that the typical firm enjoys. (Hint: Note that the marginal cost function is linear.)
d. If an output tax is imposed on ONE firm's output such that the ONE firm has a new marginal cost (including the tax) of:  what will the firm's new rate of production be after the tax is imposed? How does this new production rate compare with the pre-tax rate? Is it as expected? Explain. Would the effect have been the same if the tax had been imposed on all firms equally? Explain.

Accepted Answer

The answer of In the long-run equilibrium of a competitive...

Question 5

Suppose the market demand curve is perfectly elastic in an increasing-cost industry. If an output tax of t per unit is imposed on all producers of the good, what happens to the market equilibrium outcome?
A) The price paid by buyers increases and output declines.
B) The price paid by buyers does not change and output decrease.
C) The price paid by buyers and output increase.
D) The price paid by buyers and output decrease.

Accepted Answer

In a perfectly elastic market demand curve, producers can sell any quantity of the product at the same price. Therefore, they cannot pass on the output tax to the buyers in the form of increased prices. As a result, the entire tax burden falls on the producers, reducing their profits. This leads to a decrease in supply and output, while the price paid by buyers remains the same. Therefore, the market equilibrium outcome is a decrease in output with no change in the price paid by buyers.

Question 6

Figure 8.8.2
-Refer to Figure 8.8.2 above. Starting with the increase in demand, the cost and supply curves will shift, indicating that this is:
A) A constant-cost industry.
B) An increasing-cost industry.
C) A decreasing-cost industry.
D) A monopolistic industry.

Accepted Answer

The increase in demand causes the price to increase, resulting in an increase in the quantity supplied. As the quantity supplied increases, the cost of producing each unit increases due to diminishing returns. As a result, the supply curve shifts upwards to represent the higher cost of production. This indicates an increasing-cost industry.

Question 7

Which of the following events does NOT occur when market demand shifts leftward in an increasing-cost industry?
A) Initially, the output produced by existing firms declines along the short-run market supply curve.
B) The market price declines below the minimum LAC due to the short-run supply response.
C) The market supply curve shifts leftward as some firms exit the market when the market price is below the minimum LAC.
D) As firms exit, the market price rises and attracts other firms to enter the market.
E) The LAC curve shifts downward as output falls.

Accepted Answer

When market demand shifts leftward in an increasing-cost industry, firms exit the market due to lower prices, which can lead to a higher market price due to reduced supply. However, this scenario does not attract new firms to enter the market because the demand has decreased, not increased. The correct response to decreased demand is a market contraction, not expansion.

Question 8

In a constant-cost industry, an increase in demand will be followed by:
A) no increase in supply.
B) an increase in supply that will not change price from the higher level that occurs after the demand shift.
C) an increase in supply that will bring price down to the level it was before the demand shift.
D) an increase in supply that will bring price down below the level it was before the demand shift.
E) a decrease in demand to keep price constant.

Accepted Answer

In a constant-cost industry, firms can increase their output without any increase in production costs, leading to an increase in supply in response to an increase in demand. This increase in supply will bring the price down to the level it was before the demand shift, as there is no increase in the cost of production. Therefore, Choice C is the best answer.

Question 9

An increasing-cost industry is so named because of the positive slope of which curve?
A) Each firm's short-run average cost curve
B) Each firm's short-run marginal cost curve
C) Each firm's long-run average cost curve
D) Each firm's long-run marginal cost curve
E) The industry's long-run supply curve

Accepted Answer

An increasing-cost industry is named for the positive slope of the industry's long-run supply curve, indicating that as output increases, the costs of production for the industry also increase. This is typically due to factors like resource depletion or increased input prices as industry output expands.

Question 10

A decreasing-cost industry has a downward-sloping:
A) long-run average cost curve.
B) long-run marginal cost curve.
C) short-run average cost curve.
D) short-run marginal cost curve.
E) long-run industry supply curve.

Accepted Answer

In a decreasing-cost industry, as output increases, the costs of production for firms decrease, leading to a downward-sloping long-run industry supply curve. This is because external economies of scale are realized as the industry expands, reducing the cost per unit for all firms in the industry.

Question 11

In an increasing-cost industry, expansion of output:
A) causes input prices to rise as demand for them grows.
B) leaves input prices constant as input demand grows.
C) causes economies of scale to occur.
D) occurs under conditions of increasing returns to scale.
E) occurs without diminishing marginal product.

Accepted Answer

In an increasing-cost industry, expansion of output causes input prices to rise as demand for them grows, leading to higher production costs. This is due to the limited supply of certain inputs that may become more expensive as the industry expands, such as skilled labor or natural resources.

Question 12

Bud Owen operates Bud's Package Store in a small college town. Bud sells six packs of beer for off-premises consumption. Bud has very limited store space and has decided to limit his product line to one brand of beer, choosing to forego the snack food lines that normally accompany his business. Bud's is the only beer retailer physically located within the town limits. He faces considerable competition, however, from sellers located outside of town. Bud regards the market as highly competitive and considers the current $2.50 per six pack selling price to be beyond his control. Bud's total and marginal cost functions are: TC = 2000 + 0.0005Q² MC = 0.001Q, where Q refers to six packs per week. Included in the fixed cost figure is a $750 per week salary for Bud, which he considers to be his opportunity cost. a. Calculate the profit maximizing output for Bud. What is his profit? Is this an economic profit or an accounting profit? b. The town council has voted to impose a tax of $.50 per six pack sold in the town, hoping to discourage beer consumption. What impact will the tax have on Bud? Should Bud continue to operate? What impact will the tax have on Bud's out-of-town competitors?

Accepted Answer

The answer of Bud Owen operates Bud's Package Store in...

Question 13

Scenario 8.2:
Yachts are produced by a perfectly competitive industry in Dystopia. Industry output (Q) is currently 30,000 yachts per year. The government, in an attempt to raise revenue, places a $20,000 tax on each yacht. Demand is highly, but not perfectly, elastic.
-Refer to Scenario 8.2. The result of the tax in the long run will be that:
A) Q falls from 30,000; P rises by less than $20,000.
B) Q falls from 30,000; P rises by $20,000.
C) Q falls from 30,000; P does not change.
D) Q stays at 30,000; P rises by $20,000.
E) Q stays at 30,000; P rises by less than $20,000.

Accepted Answer

Given the highly elastic demand, consumers are sensitive to price changes. Thus, a $20,000 tax per yacht will decrease quantity demanded (Q falls from 30,000) and increase the price, but by less than $20,000, as some of the tax burden is absorbed by producers.

Question 14

The squishy industry is competitive and the market price is $0.80. Apu's long-run cost function is:  where r is the price Apu pays to lease a squishy machine and q is squishy output. The long-run marginal cost curve is:  What is Apu's optimal output if the price Apu pays to lease a squishy machine is $1.10? Suppose the lease price of squishy machines falls by $0.55. What happens to Apu's optimal output if the market price for a squishy remains at $0.80? Did profits increase for Apu when the lease rate of squishy machines fell?

Accepted Answer

The answer of The squishy industry is competitive and the...

Question 15

Consider a competitive market in which the market demand for the product is expressed as
P = 75 - 1.5Q,
and the supply of the product is expressed as
P = 25 + 0.50Q.
Price, P, is in dollars per unit sold, and Q represents rate of production and sales in hundreds of units per day. The typical firm in this market has a marginal cost of
MC = 2.5 + 10q.
a. Determine the equilibrium market price and rate of sales.
b. Determine the rate of sales of the typical firm, given your answer to part (a) above.
c. If the market demand were to increase to  what would the new price and rate of sales in the market be? What would the new rate of sales for the typical firm be?
d. If the original supply and demand represented a long-run equilibrium condition in the market, would the new equilibrium (c) represent a new long-run equilibrium for the typical firm? Explain.

Accepted Answer

The answer of Consider a competitive market in which the...

Question 16

Figure 8.8.1 -Refer to Figure 8.8.1 above. After the increase in demand, from D₁ to D₂ in panel (b), and being this a constant-cost industry, what is likely to happen in the market? A) Supply will not shift, and the market will settle in equilibrium at point B. B) Supply will shift to S₂ and the market will settle in equilibrium at point C. C) Supply will shift to S₂ and the market will settle in equilibrium back at point A, after going through B and then C. D) Supply will not shift and the market will settle in equilibrium back at point A after moving only temporarily to point B.

Accepted Answer

Since this is a constant-cost industry, an increase in demand will result in a higher equilibrium quantity, but no change in the equilibrium price. Therefore, supply will shift to S₂ and the market will settle in equilibrium at point C, where the new demand curve intersects the new supply curve.

Question 17

Which of the following cases are examples of industries that have potentially increasing costs due to scarce inputs?
A) Petroleum production
B) Medical care
C) Legal services
D) All of the above

Accepted Answer

Petroleum production requires finite resources that are becoming scarcer over time, such as oil reserves, which can increase the cost of production as companies must invest in more advanced technologies or explore more remote and difficult-to-reach areas for new resources. Medical care and legal services also rely heavily on skilled labor and specialized inputs, such as advanced medical equipment or legal expertise, that can become increasingly scarce and expensive over time.

Question 18

In a constant-cost industry, price always equals:
A) LRMC and minimum LRAC.
B) LRMC and LRAC, but not necessarily minimum LRAC.
C) minimum LRAC, but not LRMC.
D) LRAC and minimum LRMC.
E) minimum LRAC and minimum LRMC.

Accepted Answer

In a constant-cost industry, the long-run market supply curve is perfectly elastic, meaning that firms enter and exit the market until price equals the long-run marginal cost (LRMC) and the minimum long-run average cost (LRAC). This ensures that firms are producing at their most efficient point and that the price reflects the lowest cost of production in the long run.

Question 19

Generally, long-run elasticities of supply are:
A) greater than short-run elasticities, because existing inventories can be exploited during shortages.
B) greater than short-run elasticities, because consumers have time to find substitutes for the good.
C) greater than short-run elasticities, because firms can make alterations to plant size and input combinations to be more flexible in production.
D) smaller than short-run elasticities, because the firm has made long-term commitments it cannot easily modify.
E) the same as short-run elasticities, because technology is not assumed to change in the long-run adjustment process.

Accepted Answer

In the long-run, firms have more flexibility to change their plant size and input combinations, making it easier to adjust their output levels in response to price changes. This increased flexibility leads to greater long-run supply elasticity compared to the short-run.

Question 20

Scenario 8.2:
Yachts are produced by a perfectly competitive industry in Dystopia. Industry output (Q) is currently 30,000 yachts per year. The government, in an attempt to raise revenue, places a $20,000 tax on each yacht. Demand is highly, but not perfectly, elastic.
-Refer to Scenario 8.2. The more elastic is demand for yachts,
A) the more Q will fall and the more P will rise.
B) the less Q will fall and the more P will rise.
C) the more Q will fall and the less P will rise.
D) the less Q will fall and the less P will rise.
E) the closer is the new equilibrium point to the old.

Accepted Answer

When demand is highly elastic, consumers are very responsive to price changes. Therefore, a tax increase will lead to a significant decrease in quantity demanded (Q falls more) because consumers will easily find substitutes or forego purchasing yachts. However, because the demand is elastic, producers cannot pass the full tax burden onto consumers in the form of higher prices (P rises less), as consumers would significantly reduce their purchases.

Quiz 8: Profit Maximization and Competitive Supply

The long-run supply curve in a constant-cost industry is linear and:

Following Example 8.8 in the book, the long-run supply of rental housing in most U.S. communities is more inelastic than the long-run supply of owner-occupied housing. Why?

Suppose the market demand curve is perfectly elastic in an increasing-cost industry. If an output tax of t per unit is imposed on all producers of the good, what happens to the market equilibrium outcome?

Figure 8.8.2 -Refer to Figure 8.8.2 above. Starting with the increase in demand, the cost and supply curves will shift, indicating that this is:

Which of the following events does NOT occur when market demand shifts leftward in an increasing-cost industry?

In a constant-cost industry, an increase in demand will be followed by:

An increasing-cost industry is so named because of the positive slope of which curve?

A decreasing-cost industry has a downward-sloping:

In an increasing-cost industry, expansion of output:

Figure 8.8.1 -Refer to Figure 8.8.1 above. After the increase in demand, from D₁ to D₂ in panel (b) , and being this a constant-cost industry, what is likely to happen in the market?

Which of the following cases are examples of industries that have potentially increasing costs due to scarce inputs?

In a constant-cost industry, price always equals:

Generally, long-run elasticities of supply are: