Question 1

Which of the following does not hold true for a perfectly competitive firm in long-run equilibrium?

Accepted Answer

The answer of Which of the following does not hold...

Question 2

In the long run, perfectly competitive firms earn zero economic profit. Why do firms enter an industry when they know that in the long-run they will not earn any profit?

Accepted Answer

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Question 3

If the long-run average cost curve is U-shaped, the optimal scale of production from society's viewpoint is

Accepted Answer

The U-shaped long-run average cost curve indicates that there is an optimal scale of production where the average cost is at its minimum level. This minimum efficient scale (MES) is the output level where the firm can produce at the lowest cost per unit of output in the long run. Therefore, from society's viewpoint, the optimal scale of production is the MES as it ensures that resources are allocated efficiently and produces goods at the lowest possible cost, in turn, leading to welfare-maximizing outcomes for consumers.

Question 4

A perfectly competitive industry achieves allocative efficiency in the long run. What does allocative efficiency mean?

Accepted Answer

Allocative efficiency means that resources are allocated in the most efficient way possible, where the marginal benefit of producing one more unit of a good is equal to the marginal cost of producing that unit. In a perfectly competitive industry, firms are price takers, meaning they cannot influence the market price for their product. Therefore, each firm produces up to the point where the price of the good equals the marginal cost of producing the last unit, achieving allocative efficiency in the long run.

Question 5

What is allocative efficiency?

Accepted Answer

Allocative efficiency refers to a situation in which resources are allocated in such a way that the last unit of output produced provides a marginal benefit to consumers equal to the marginal cost of producing it. In other words, it's a situation where resources are allocated to produce the goods and services that are most valued by consumers.

Question 6

Why would a company continue to operate for many years while never once turning a profit rather than shut down immediately? Using revenue and cost analysis, explain when the company would shut down.

Accepted Answer

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Question 7

Assume that the personal computer industry is perfectly competitive. The fact that the price of personal computers over the last decade has fallen despite increases in demand signifies that the industry is a decreasing-cost industry.

Accepted Answer

In a perfectly competitive decreasing-cost industry, as demand increases, the firms experience lower production costs due to economies of scale, leading to a decrease in the market price of the product. The fact that the price of personal computers has fallen despite increases in demand suggests that the industry is indeed a decreasing-cost industry.

Question 8

The perfectly competitive market structure benefits consumers because

Accepted Answer

In a perfectly competitive market structure, firms are forced to be as efficient as possible due to the competitive pressure from other firms. This leads to lower prices for consumers as firms try to minimize their costs to remain competitive. As a result, consumers benefit from lower prices and higher quality goods. Therefore, option B is the correct answer.

Question 9

In early 2007, Pioneer and JVC, two Japanese electronics firms, each announced that their profits were going to be lower than expected because they both had to cut prices for LCD and plasma television sets. Which of the following could explain why these firms did not simply raise their prices and increase their profits?

Accepted Answer

Intense competition between the two firms likely pushed prices down, and each feared losing customers to the other if they raised prices.

Question 10

Which of the following describes a situation in which every good or service is produced up to the point where the last unit provides a marginal benefit to consumers equal to the marginal cost of producing it?

Accepted Answer

Allocative efficiency is when resources are allocated in a way that provides the greatest benefit to society, which occurs when the marginal benefit of producing a good or service is equal to its marginal cost. This means that every unit produced is creating the maximum possible value for society. Productive efficiency (A) refers to using the least amount of resources possible to produce a good or service, while marginal efficiency (C) is not a commonly used economic term. Profit maximization (D) refers to a firm's goal of earning the most possible profit, which may not necessarily result in allocatively efficient outcomes.

Question 11

A perfectly competitive industry achieves allocative efficiency when

Accepted Answer

Allocative efficiency is achieved when production is at a level where the marginal benefit (MB) to consumers of the last unit produced equals the marginal cost (MC) of producing it. This ensures that resources are being allocated in such a way that the satisfaction gained from the last unit produced is equal to the costs of producing it. In a perfectly competitive market, firms will produce up to the point where the market price equals the MC of production, therefore achieving allocative efficiency.

Question 12

Figure 12-19 
-Refer to Figure 12-19. The figure above shows the cost curves of a perfectly competitive firm in the coffee market. Use the graph in Figure 12-19 to answer the following questions. Assume the market price is $3 per pound.
a. What is the lowest price at which the coffee grower will supply output in the short run?
b. In the diagram draw the firm's demand curve (label this "MR" for marginal revenue).
c. What is the firm's profit-maximizing output?
d. Is the firm earning a profit or a loss? Identify the area in the graph that represents the firm's profit or loss.
e. Explain how entry or exit will occur in the market to ensure that firms will break even in the long run.

Accepted Answer

The answer of Figure 12-19 
-Refer to Figure 12-19. The...

Question 13

Figure 12-20 -Refer to Figure 12-20. If the market price is P₁, what is the allocatively efficient output level?

Accepted Answer

The answer of Figure 12-20 
-Refer to Figure 12-20. If...

Question 14

What is productive efficiency?

Accepted Answer

Productive efficiency occurs when resources are allocated in such a way that goods can be produced at the lowest possible average cost. In other words, firms are using their resources as efficiently as possible to produce goods at the lowest cost, which allows them to sell their products at a lower price while still making a profit. This benefits both consumers, who can purchase goods at a lower price, and producers, who can increase their profitability.

Question 15

What is meant by the term "long-run competitive equilibrium?

Accepted Answer

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Question 16

Figure 12-18 
-Refer to Figure 12-18. Use the figure above to answer the following questions.
a. How can you determine that the figure represents a graph of a perfectly competitive firm? Be specific; indicate which curve gives you the information and how you use this information to arrive at your conclusion.
b. What is the market price?
c. What is the profit-maximizing output?
d. What is total revenue at the profit-maximizing output?
e. What is the total cost at the profit-maximizing output?
f. What is the profit or loss at the profit-maximizing output?
g. What is the firm's total fixed cost?
h. What is the total variable cost?
i. Identify the firm's short-run supply curve.
j. Is the industry in a long-run equilibrium?
k. If it is not in long-run equilibrium, what will happen in this industry to restore long-run equilibrium?
l. In long-run equilibrium, what is the firm's profit maximizing quantity?

Accepted Answer

The answer of Figure 12-18 
-Refer to Figure 12-18. Use...

Question 17

Writing in the New York Times on the technology boom of the late 1990s, Michael Lewis argues, "The sad truth, for investors, seems to be that most of the benefits of new technologies are passed right through to consumers free of charge." What does Lewis means by the benefits of new technology being "passed right through to consumers free of charge"?

Accepted Answer

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Question 18

Assume that the 4K and OLED television sets industry is perfectly competitive. Suppose a producer develops a successful innovation that enables it to lower its cost of production. What happens in the short run and in the long run?

Accepted Answer

In the short run, the firm will be able to increase its economic profits by lowering its cost of production. However, in the long run, other firms will copy the innovation, leading to a decrease in the price of the 4K and OLED television sets industry due to increased competition. As a result, the economic profit of the firm will be eliminated, and it will only earn normal profits. Therefore, the best answer is D.

Question 19

What is a long-run supply curve? What does a long-run supply curve look like on a perfectly competitive market graph?

Accepted Answer

The answer of What is a long-run supply curve? What...

Question 20

Which of the following describes a situation in which a good or service is produced at the lowest possible cost?

Accepted Answer

Productive efficiency occurs when a good or service is produced at the lowest possible cost, meaning that all resources are being used in the most effective way possible to produce the good or service. This leads to the lowest possible average total cost, which is an important goal for producers to achieve. Allocative efficiency, on the other hand, occurs when resources are allocated to produce the combination of goods and services that society most desires. Marginal efficiency is not a commonly used term in economics, and profit maximization may not necessarily lead to productive efficiency.

Quiz 12: Firms in Perfectly Competitive Markets