Question 1

A purely competitive firm

Accepted Answer

A purely competitive firm will earn zero economic profit in the long run because there are no barriers to entry, and if a firm earns economic profit, new firms will enter the market, bringing prices down and eliminating economic profit. In the short run, the firm may earn economic profit or losses due to market changes or fluctuations in input prices.

Question 2

Assume that a decline in consumer demand occurs in a purely competitive industry that is initially in long-run equilibrium.We can

Accepted Answer

The answer of Assume that a decline in consumer demand...

Question 3

Assume a purely competitive firm is maximizing profit at some output at which long-run average total cost is at a minimum.Then

Accepted Answer

When a purely competitive firm is producing at the minimum point of its long-run average total cost curve, it is achieving productive efficiency and earning normal profit. There is no incentive for firms to enter or exit the industry, so there is no tendency for the industry to expand or contract.

Question 4

Purely competitive industry X has constant costs and its product is an inferior good.The industry is currently in long-run equilibrium.The economy now goes into a recession and average incomes decline.The result will be

Accepted Answer

In a recession, incomes decline, leading to increased demand for inferior goods. In a purely competitive industry with constant costs, the increased demand will lead to an increase in output, but the price will remain unchanged due to constant costs.

Question 5

Resources are efficiently allocated when production occurs where

Accepted Answer

Production occurs where price is equal to marginal cost because at this point, the additional cost of producing an extra unit of output is equal to the additional revenue earned from selling that unit. This results in maximizing profits for the producer and ensures that resources are allocated efficiently.

Question 6

When LCD televisions first came on the market, they sold for at least $1,000, and some for much more.Now many units can be purchased for under $400.These facts imply that

Accepted Answer

The decrease in prices over time suggests that the LCD television industry is a decreasing-cost industry, where costs decrease as production increases, leading to lower prices.

Question 7

In a decreasing-cost industry,

Accepted Answer

In a decreasing-cost industry, as demand decreases, firms exit, reducing supply and increasing long-run equilibrium prices.

Question 8

Suppose an increase in product demand occurs in a decreasing-cost industry.As a result,

Accepted Answer

In a decreasing-cost industry, as demand increases, firms experience lower costs due to economies of scale or technological improvements. This leads to a lower long-run equilibrium price as the industry expands.

Question 9

Suppose losses cause industry X to contract and, as a result, the prices of relevant inputs decline.Industry X is

Accepted Answer

The answer of Suppose losses cause industry X to contract...

Question 10

Suppose that an industry's long-run supply curve is downsloping.This suggests that

Accepted Answer

A downsloping long-run supply curve indicates that as the industry expands, costs decrease, which is characteristic of a decreasing-cost industry.

Question 11

A purely competitive firm is precluded from making economic profits in the long run because

Accepted Answer

In a purely competitive market, the absence of barriers to entry allows new firms to enter the market when existing firms are making economic profits, driving prices down until only normal profits are possible in the long run.

Question 12

When a purely competitive firm is in long-run equilibrium,

Accepted Answer

In long-run equilibrium, a purely competitive firm is producing at the minimum point of its average total cost curve. At this point, price equals marginal cost, allowing the firm to earn normal profits. If price were greater than marginal cost, the firm could increase profits by producing more. Similarly, if price were less than marginal cost, the firm would be better off by reducing production or shutting down. Therefore, B is the correct answer.

Question 13

Allocative efficiency is achieved when the production of a good occurs where

Accepted Answer

Allocative efficiency occurs when the marginal cost of production equals the price of the good.

Question 14

An increasing-cost industry is the result of

Accepted Answer

An increasing-cost industry experiences higher resource prices as it expands because the demand for inputs increases, leading to higher costs.

Question 15

If a purely competitive constant-cost industry is realizing economic profits, we can expect industry supply to

Accepted Answer

In a purely competitive constant-cost industry, economic profits attract new firms, increasing supply, which raises output, decreases price, and reduces profits.

Question 16

An increasing-cost industry is associated with

Accepted Answer

An increasing-cost industry is one in which the cost of production increases as output increases in the long run. This means that firms in the industry will require higher prices to cover their increasing costs, which leads to an upsloping long-run supply curve.

Question 17

Under what conditions would an increase in demand lead to a lower long-run equilibrium price?

Accepted Answer

In a decreasing-cost industry, as demand increases, firms experience lower average costs due to economies of scale or technological improvements, which can lead to a lower long-run equilibrium price.

Question 18

A decreasing-cost industry is one in which

Accepted Answer

The answer of A decreasing-cost industry is one in which
...

Question 19

A constant-cost industry is one in which

Accepted Answer

In a constant-cost industry, resource prices do not change as output is increased. This means that the industry can expand without facing higher input costs. This can happen when the industry (or its suppliers) can easily access additional inputs without bidding up their price. For example, the market for shipping containers is often considered a constant-cost industry because producing more containers does not significantly affect the cost of materials used in container manufacturing.

Question 20

A firm is producing an output such that the benefit from one more unit is more than the cost of producing that additional unit.This means the firm is

Accepted Answer

The answer of A firm is producing an output such...

Quiz 11: Pure Competition in the Long Run