Question 1

Suppose that a competitive market is initially in long-run equilibrium. Which of the following are the most likely results of an increase in market demand?

Accepted Answer

An increase in market demand will lead to higher profits for firms, which will attract new firms to enter the market. Existing firms will also increase their production in order to take advantage of the higher prices. Both of these factors will shift the market supply curve to the right, resulting in a new long-run equilibrium with a higher quantity and price. Option A is incorrect because firms would not produce less if demand increases. Option B is incorrect because some firms would exit while others would increase production in response to the increase in demand. Option D is incorrect because it doesn't take into account the profit motive of firms to enter and exit the market. Option E is also incorrect because an increase in demand would lead to changes in the market equilibrium.

Question 2

Exhibit 9-1 
-Refer to Exhibit 9-1. Which demand curve results in economic losses?

Accepted Answer

Economic losses occur when the demand curve is below the average total cost curve at the profit-maximizing output level.

Question 3

The difference between accounting profit and economic profit is

Accepted Answer

Implicit costs are the primary difference between accounting profit and economic profit, as they include non-monetary costs like the opportunity cost of the owner's time, which is not considered in accounting profit but is in economic profit.

Question 4

If market demand increases, a competitive firm sees

Accepted Answer

When market demand increases, the price at which the firm can sell its output also increases. This leads to an increase in the marginal revenue curve, which intersects the marginal cost curve at a higher level of output. As a result, the profit-maximizing output level of the firm increases.

Question 5

Exhibit 9-1 
-Refer to Exhibit 9-1. Which of the following describes a long-run competitive equilibrium?

Accepted Answer

In a long-run competitive equilibrium, firms will produce at the minimum efficient scale of production, where average total cost is minimized. This occurs where the long-run supply curve intersects the demand curve at point E, which corresponds to a price of P₂ and a quantity of 450 units. Each firm will produce 75 units at this price and quantity.

Question 6

Exhibit 9-1 
-Refer to Exhibit 9-1. If all firms are identical, the equilibrium number of firms in the industry is

Accepted Answer

The equilibrium number of firms in the industry is 3,333. This is because the profit-maximizing output for each firm is 100 units, and the market demand is 333,300 units. Therefore, the number of firms that can profitably operate in the industry is 333,300 / 100 = 3,333.

Question 7

When market demand increases in a competitive industry,

Accepted Answer

When market demand increases, it typically leads to higher prices and profits in the short run, attracting new firms to enter the industry, which increases the number of firms and the short-run market supply.

Question 8

Suppose a dentist has total revenue of $320,000, and his total costs are $250,000 for the year. Also suppose the dentist left a job paying $112,000 a year to start his own practice. What is the dentist's accounting profit?

Accepted Answer

The dentist's accounting profit is calculated by subtracting total costs from total revenue, which is $320,000 - $250,000 = $70,000.

Question 9

An increase in market demand can be shown by shifting a firm's demand curve to the right.

Accepted Answer

The answer of An increase in market demand can be...

Question 10

Exhibit 9-2 -Refer to Exhibit 9-2. If the demand curve shifts from D₁ to D₂, then

Accepted Answer

When the demand curve shifts from D1 to D2, it typically indicates an increase in demand. This can lead to higher prices and profits, attracting new firms to enter the industry.

Question 11

A normal profit may be defined as

Accepted Answer

A normal profit is the minimum amount of profit required to keep a business operating in the long run. It is the level of profit needed for a business to cover all of its costs, including opportunity costs, and to remain viable in the long term. If a business earns only a normal profit, it is not earning any excess profit or economic profit.

Question 12

Suppose a mechanic uses $150,000 of his own money to start a business. The rate of interest he could earn in a savings account is 5 percent, and the rate of interest he could earn by investing in bonds is 8 percent. What is the opportunity cost of capital when the mechanic uses his money to start his own business?

Accepted Answer

Opportunity cost of capital is the return foregone from the next best alternative investment. Here, the mechanic has two options either to invest in a savings account with a 5% rate of interest or invest in bonds with an 8% rate of interest. 
Hence, the opportunity cost of capital is the return foregone from investing in the bonds, which is:
= $150,000 x 8% = $12,000 per year. 
Therefore, the answer is D).

Question 13

Exhibit 9-1 -Refer to Exhibit 9-1. If the market demand curve is D₃, what happens over time?

Accepted Answer

If the market demand curve is D3, it suggests an increase in demand. Over time, some existing firms may increase capital input to expand production and meet the higher demand.

Question 14

Exhibit 9-1 
-Refer to Exhibit 9-1. Which demand curve results in normal profits?

Accepted Answer

Normal profits occur when total revenue equals total costs, including opportunity costs. Demand curve D₂ likely represents this scenario.

Question 15

Exhibit 9-2 -Refer to Exhibit 9-2. If the market demand curve is D₁, then the firm earns normal profit.

Accepted Answer

At the equilibrium point where the market demand curve D₁ intersects the firm's supply curve, the firm produces the quantity Q₁ and sells it at the price P₁. The firm's total revenue is P₁Q₁, and its total cost is also P₁Q₁. Therefore, the firm earns normal profit.

Question 16

When economic profit is equal to zero, we say that

Accepted Answer

When economic profit is equal to zero, it means that the total revenue is enough to cover both explicit (out-of-pocket) and implicit (opportunity) costs, which is referred to as a normal profit. This means the business is operating efficiently and is covering all of its costs, but it is not earning any extra profit above and beyond those costs.

Question 17

In the long run, market supply increases as market demand increases.

Accepted Answer

When there is an increase in market demand, businesses are incentivized to produce and sell more goods and services to meet that demand, which leads to an increase in market supply in the long run.

Question 18

Suppose a dentist has total revenue of $320,000, and his total costs are $250,000 for the year. Also suppose the dentist left a job paying $112,000 a year to start his own practice. What is the dentist's economic profit?

Accepted Answer

Economic profit is calculated by subtracting all costs (including opportunity costs) from total revenue. In this case, the opportunity cost is the $112,000 salary the dentist gave up to start his own practice. 
Economic profit = total revenue - total costs - opportunity cost
Economic profit = $320,000 - $250,000 - $112,000
Economic profit = $42,000
Therefore, the best choice is B.

Question 19

Exhibit 9-1 -Refer to Exhibit 9-1. If the market demand curve is D₁, what happens in the long run?

Accepted Answer

The answer of Exhibit 9-1 
-Refer to Exhibit 9-1. If...

Question 20

Exhibit 9-1 
-Refer to Exhibit 9-1. When does firm entry occur?

Accepted Answer

Firm entry occurs when demand is at D₃ because this indicates a higher demand level, leading to higher prices and profits, which attract new firms into the market.

Quiz 9: The Rise and Fall of Industries

Suppose that a competitive market is initially in long-run equilibrium. Which of the following are the most likely results of an increase in market demand?

Exhibit 9-1 -Refer to Exhibit 9-1. Which demand curve results in economic losses?

The difference between accounting profit and economic profit is

If market demand increases, a competitive firm sees

Exhibit 9-1 -Refer to Exhibit 9-1. Which of the following describes a long-run competitive equilibrium?

Exhibit 9-1 -Refer to Exhibit 9-1. If all firms are identical, the equilibrium number of firms in the industry is

When market demand increases in a competitive industry,

Suppose a dentist has total revenue of $320,000, and his total costs are $250,000 for the year. Also suppose the dentist left a job paying $112,000 a year to start his own practice. What is the dentist's accounting profit?

An increase in market demand can be shown by shifting a firm's demand curve to the right.

Exhibit 9-2 -Refer to Exhibit 9-2. If the demand curve shifts from D1 to D2, then

A normal profit may be defined as

Exhibit 9-1 -Refer to Exhibit 9-1. If the market demand curve is D3, what happens over time?

Exhibit 9-1 -Refer to Exhibit 9-1. Which demand curve results in normal profits?

Exhibit 9-2 -Refer to Exhibit 9-2. If the market demand curve is D1, then the firm earns normal profit.