Question 1

In a perfectly competitive market,an individual firm faces a demand curve that _____.

Accepted Answer

In a perfectly competitive market, each firm is a price taker and has no control over the market price. Therefore, the demand curve faced by an individual firm is perfectly elastic or horizontal at the equilibrium price. The firm can sell as much output as it wants at the market price, but cannot charge a higher price without losing all its customers.

Question 2

The height of an individual demand curve at each level of output shows:

Accepted Answer

The height of an individual demand curve at each level of output represents the willingness of consumers to pay for an additional unit of the good, which is equivalent to the marginal benefit they receive from consuming it. Therefore, B is the correct answer as it represents the marginal benefit from consuming an extra unit of the good.

Question 3

If the long-run market supply curve in a perfectly competitive industry is upward sloping,then the industry:

Accepted Answer

An upward sloping long-run supply curve suggests that as the industry expands, costs for firms will increase. This indicates that the industry is experiencing increasing costs, making choice B the correct answer. Choice A (constant-cost industry) would have a horizontal long-run supply curve, while choice E (decreasing-cost industry) would have a downward sloping long-run supply curve. Choices C and D are unrelated to the slope of the long-run supply curve.

Question 4

Suppose that demand for and supply of a commodity in a market are shown on a graph with price on the vertical axis and quantity on the horizontal axis.The y-intercept of the demand curve is equal to $30.The equilibrium price and quantity are $20 and 300 units respectively.What is the total consumer surplus in the market?

Accepted Answer

The answer of Suppose that demand for and supply of...

Question 5

The goods produced by firms in a perfectly competitive market are:

Accepted Answer

In a perfectly competitive market, firms are price takers and have no control over the price of their product. Therefore, they must sell a homogeneous or identical product to consumers, meaning that goods produced by one firm are perfectly identical or indistinguishable from goods produced by other firms.

Question 6

In the long run,perfectly competitive firms are in equilibrium when _____.

Accepted Answer

In the long run, perfectly competitive firms are in equilibrium when price is equal to the long-run marginal cost. This is because in perfect competition, firms cannot influence the market price and must take it as given. Thus, in the long run, firms will only stay in the market if they are able to produce their output at the lowest possible cost, which means producing at the point where price equals long-run marginal cost. Any higher price means there is an opportunity for other firms to enter the market and produce at a lower cost, while any lower price means firms will incur losses and exit the market.

Question 7

Other things remaining unchanged,the supply curve for eggs will shift downward and to the right if:

Accepted Answer

A decrease in the price of chicken feed reduces production costs for poultry farmers, allowing them to supply more eggs at each price level, thus shifting the supply curve downward and to the right.

Question 8

Everything else remaining unchanged,an increase in demand will lead to:

Accepted Answer

An increase in demand will cause a rightward shift of the demand curve. This means that at each price point, consumers are willing to purchase a greater quantity of the good, leading to an increase in both price and quantity demanded.

Question 9

If the price of a good increases and is above the equilibrium price,then:

Accepted Answer

When the price of a good is above the equilibrium price, it means that the price is higher than where demand and supply intersect. This leads to a surplus where the quantity supplied exceeds the quantity demanded. As a result, suppliers' inventories will start to build up because they are producing more than what is being bought. To reduce this surplus, suppliers will likely reduce their output and lower prices to stimulate demand and move back towards equilibrium.

Question 10

The supply curve of a perfectly competitive firm is:

Accepted Answer

The supply curve of a perfectly competitive firm is the portion of the marginal cost curve that lies above the average variable cost curve. This is because a firm will only supply output if the price (or marginal revenue) covers the average variable costs, ensuring that it can at least cover its variable costs in the short run.

Question 11

In order to maximize profits,a perfectly competitive firm will continue producing until:

Accepted Answer

A perfectly competitive firm will continue producing as long as the marginal cost of producing another unit is less than or equal to the market price. This is because producing additional units beyond this point would result in greater costs than revenue, leading to a loss. Therefore, the firm will produce until the point where marginal cost equals market price, which ensures that each unit produced adds to profits.

Question 12

Demand for a good is given by: QD = 100 - P and supply by QS = 0.5P - 20,where P is the market price of the good.In equilibrium,price and output under perfect competition will be:.:

Accepted Answer

In equilibrium, demand (QD) must be equal to supply (QS), so:

100 - P = 0.5P - 20

Solving for P:

1.5P = 120

P = 80

Substituting P back into either the demand or supply equation gives:

QD = 100 - 80 = 20

QS = 0.5(80) - 20 = 20

Therefore, the equilibrium price is $80 and the equilibrium quantity is 20 units. So, the correct answer is B.

Question 13

The demand curve faced by an individual firm in a competitive market,implies that the firm:

Accepted Answer

In a competitive market, the individual firm is a price taker, which means it has to accept the market price as given and adjust its production level accordingly. The demand curve faced by the individual firm is perfectly elastic, which means any attempt to raise the price will result in the loss of all its customers to other firms. Therefore, the only rational strategy for the firm is to produce at the level where its marginal cost equals the market price.

Question 14

Coal is an input in the production of oil.Suppose that over the last 3 months,the price of oil has increased and the quantity sold of oil has fallen.Other things remaining the same,which of the following is most likely to be true?

Accepted Answer

The answer of Coal is an input in the production...

Question 15

Everything else remaining unchanged,an increase in the supply of a good will lead to:

Accepted Answer

According to the law of supply, an increase in supply leads to a surplus of goods, which in turn leads to a decrease in price. As the price falls, consumers are incentivized to purchase more of the good, leading to an increase in consumption. Therefore, choice (A) is the correct answer.

Question 16

Suppose a severe freeze damages the Florida orange crop.Everything else remaining unchanged,which of the following is most likely to be true?

Accepted Answer

A severe freeze damaging the Florida orange crop would lead to a decrease in the supply of oranges. If everything else remains unchanged (i.e., demand for oranges stays the same), the decrease in supply would result in an increase in price and a decrease in output. Therefore, the best choice is E, as it correctly predicts a fall in output and an increase in price.

Question 17

What is meant by consumer surplus?

Accepted Answer

Consumer surplus is the difference between the maximum price a consumer is willing to pay for a good and the actual price they pay. It represents the net gain that buyers obtain from purchasing a good. It is a measure of the total satisfaction that consumers gain from consuming a good or service, over and above what they actually paid for it.

Question 18

Which of the following is a characteristic of a perfectly competitive industry?

Accepted Answer

A characteristic of a perfectly competitive industry is that it has a large number of small firms. This means that no single firm has market power to influence the market price.

Question 19

In the long run,firms in a perfectly competitive industry are most likely to:

Accepted Answer

In a perfectly competitive industry, firms are price takers and cannot influence the market price. Therefore, they will produce at the minimum point of their average total cost curve in the long run, earning only normal profits (zero economic profits). If a firm earns positive economic profits, new firms will enter the market, increasing supply and reducing the price, until economic profits are driven back to zero. Similarly, if a firm earns negative economic profits, some firms will exit the market, reducing supply and increasing the price, until economic profits are driven back to zero. As a result, in the long run, only firms that can produce at the minimum cost will survive.

Question 20

The price of fresh fish rose and the quantity sold fell.Other things remaining the same,which of the following is consistent with this observation?

Accepted Answer

An increase in the cost of fishing would lead to a decrease in the supply of fresh fish, causing the price to rise and the quantity sold to fall, assuming demand remains constant.

Quiz 7: Perfect Competition