Question 1

In a perfectly competitive industry, i. entry by new firms shifts the market supply curve rightward.
Ii) exit by existing firms shifts the market supply curve leftward.
Iii) at all times existing firms make only zero economic profit.

Accepted Answer

In a perfectly competitive industry, entry by new firms increases the total quantity of goods or services supplied, shifting the market supply curve rightward. Similarly, exit by existing firms reduces the total quantity supplied, shifting the market supply curve leftward. However, it's not true that existing firms make only zero economic profit at all times; they can make positive or negative economic profits in the short run, but in the long run, economic profits tend to zero due to entry and exit.

Question 2

-If perfectly competitive lawn-care firms are making an economic profit, then

Accepted Answer

In a perfectly competitive market, economic profits attract new firms because there are no barriers to entry. These new firms increase the supply in the market, which leads to a decrease in the price of the service until economic profits are eliminated and firms earn only a normal profit.

Question 3

A market is initially in a long-run equilibrium and there is a permanent increase in demand. After the new long-run equilibrium is reached, there

Accepted Answer

In response to a permanent increase in demand, profits in the market initially rise, attracting new firms. This entry of new firms continues until profits return to their normal level, resulting in more firms in the market at the new long-run equilibrium.

Question 4

-Suppose a perfectly competitive market is in long-run equilibrium and then there is a permanent increase in the demand for that product. The new long-run equilibrium will have

Accepted Answer

In a perfectly competitive market, a permanent increase in demand leads to higher prices and profits in the short run, attracting new firms into the market. In the long-run equilibrium, the entry of new firms increases supply, which lowers prices back to the level of minimum average cost, ensuring firms earn normal profit. Thus, the market ends up with more firms.

Question 5

A perfectly competitive market is in equilibrium and then demand decreases. The decrease in demand means the market price will ________ and eventually there will be ________.

Accepted Answer

In a perfectly competitive market, if demand decreases, there will be excess supply at the original equilibrium price. This will lead to a fall in the market price to a new equilibrium point. As a result, existing firms in the market will now earn lower profits, and some may even incur losses. This will incentivize them to exit the market, leading to a reduction in the number of firms in the industry. Hence, the correct answer is D - fall in price and exit by existing firms.

Question 6

-The corn market is perfectly competitive, with thousands of corn farmers. In the 2000s, the price of corn soared so that new farmers entered the corn market. Initially, entry ________ the economic profit of the initial corn farmers and in the long run the initial corn farmers ________.

Accepted Answer

Initially, the entry of new farmers would increase supply, leading to a decrease in the price of corn. This decrease in price would lower the economic profit of the initial corn farmers. In the long run, as the market adjusts and more farmers enter, the economic profit would be driven down to zero due to the perfectly competitive nature of the market, where firms earn zero economic profit in the long run.

Question 7

Technological change allows perfectly competitive firms to ________ and leads to ________.

Accepted Answer

Technological change generally leads to lower costs for firms, which allows them to lower prices for consumers in order to remain competitive. This is because technological advancements can increase efficiency, reduce waste, and streamline production processes. As costs decrease, firms can afford to charge lower prices while still maintaining profitability. This benefit for consumers can result in increased demand for the product or service, leading to further growth for the firm.

Question 8

If perfectly competitive firms are making an economic profit, the economic profit

Accepted Answer

Economic profit for perfectly competitive firms indicates that their price is higher than the average total cost. This attracts entry by more firms, increasing the supply and lowering the price until economic profit is zero in the long run. Thus, option C is the correct answer. Option A states that firms exit, but in reality, firms enter the market until profits are driven to zero. Option B is incorrect because normal profit is included in the calculation of economic profit. Option D is incorrect as economic profit indicates that demand is greater than supply, leading to entry by more firms. Finally, option E is incorrect because economic profit can only be earned in the short run as more firms enter and push profits towards zero in the long run.

Question 9

-To eliminate losses in a perfectly competitive market, firms exit the industry. This exit results in

Accepted Answer

When firms exit an industry, the total quantity of the product available in the market decreases, leading to a decrease in market supply. Market demand remains unchanged by firms exiting.

Question 10

In the long run, a perfectly competitive firm makes

Accepted Answer

In the long run, a perfectly competitive firm makes zero economic profit because if firms are making positive economic profit, new firms will enter the market, increasing competition and lowering prices, thus driving economic profit to zero. Similarly, if firms are making negative economic profit (economic loss), some firms will exit the market, decreasing competition and increasing prices, thus driving economic profit back to zero.

Question 11

Keith is a perfectly competitive carnation grower. The market price is $2 per dozen carnations. Keith's average total cost to grow carnations is $2.50 per dozen. In the long run, Keith will

Accepted Answer

In a perfectly competitive market, individual firms are price takers, meaning they cannot set their own prices but must accept the market price. If Keith's average total cost is $2.50 per dozen but the market price is only $2.00, he is operating at a loss of $0.50 per dozen. If these conditions persist in the long run, Keith will exit the industry because he cannot cover his costs, let alone make a profit.

Question 12

The potato market is perfectly competitive. Research is published claiming that eating potatoes leads to gaining weight and so the demand for potatoes permanently decreases. The permanent decrease in demand results in a

Accepted Answer

With a permanent decrease in demand, the market will experience a shift to the left of the demand curve which will result in a lower equilibrium price and quantity. This lower price will result in economic losses for potato farmers, and some farmers may exit the market. There will be no economic profits or entry into the market in this scenario.

Question 13

In the long run, a perfectly competitive firm

Accepted Answer

In the long run, a perfectly competitive firm makes zero economic profit due to the entry and exit of firms in the market, which drives the price to the level of average total cost.

Question 14

Suppose a perfectly competitive market is in long-run equilibrium with a price of $12. Then there is a permanent increase in demand. As a result, in the short run the market price ________ and in the long run the number of firms ________ and the price is ________ the price was in the short run.

Accepted Answer

In the short run, an increase in demand raises the price due to the fixed number of firms. In the long run, new firms enter the market, increasing supply, which lowers the price back towards the long-run equilibrium, but it remains higher than the original due to the increased demand.

Question 15

In the long run, perfectly competitive firms produce at the output level that has the minimum

Accepted Answer

Perfectly competitive firms aim to maximize profits, which occurs when marginal cost equals marginal revenue. In the long run, they adjust their production to achieve the lowest possible average total cost, which corresponds to the point where marginal cost equals average total cost. Therefore, perfectly competitive firms produce at the output level that has the minimum average total cost.

Question 16

-When firms in a perfectly competitive market incur economic losses, exit by some firms means the market supply will

Accepted Answer

When firms exit a perfectly competitive market due to economic losses, the total market supply decreases because there are fewer firms contributing to the overall market supply.

Question 17

In the long run, new firms enter a perfectly competitive market when

Accepted Answer

New firms enter a perfectly competitive market when there are economic profits to be made. This is because economic profits indicate that the industry is earning more than just covering opportunity costs, which is an incentive for new firms to enter and try to capture a share of those profits. In contrast, when economic profits are zero or negative (normal profit), there is no incentive for new firms to enter since they can only cover their opportunity costs at best.

Question 18

If the technology associated with producing fibre-optic cable continues to advance, over time the cost of producing fibre-optic cable will

Accepted Answer

If the technology associated with producing fibre-optic cable continues to advance, the cost of producing fibre-optic cable will decrease. Firms using the new technology will have lower costs and higher profits, which will attract new firms to enter the market. Therefore, in the long run, new firms will enter the market and some existing firms may exit, leading to increased competition and lower prices for consumers.

Question 19

In the long run, existing firms exit a perfectly competitive market

Accepted Answer

In a perfectly competitive market, existing firms will exit the market only if they incur an economic loss. This is because, in the long run, firms in a perfectly competitive market will enter or exit until they are just covering their opportunity costs, earning zero economic profit. Economic losses, which are below this break-even point, prompt firms to exit.

Question 20

When a firm adopts new technology, generally its

Accepted Answer

By adopting new technology, firms can usually increase their productivity and efficiency, which leads to lower costs of production. This causes a downward shift in the firm's cost curves, allowing them to produce the same output at a lower cost or produce more output at the same cost.

Quiz 14: Perfect Competition

In a perfectly competitive industry, i. entry by new firms shifts the market supply curve rightward. Ii) exit by existing firms shifts the market supply curve leftward. Iii) at all times existing firms make only zero economic profit.