Question 1

Lawn-mowing service is a perfectly competitive industry.Alex's Lawn-Mowing Service should shut down in the short run whenever his profits are negative.

Accepted Answer

In a perfectly competitive industry, a firm should shut down in the short run if the price is below the average variable cost, not just when profits are negative. If the firm can cover its variable costs, it should continue operating to contribute to fixed costs.

Question 2

(Table: Variable Costs for Lawns) Look at the table Variable Costs for Lawns.During the summer Alex runs a lawn-mowing service, and lawn-mowing is a perfectly competitive industry made up of 100 identical firms.The table shows his variable costs for lawn-mowing and the number of lawns mowed.Alex's fixed cost is $1,000 for the mower.His variable costs include fuel, his time, and mower parts.Which of the following is a point on Alex's short-run supply curve?
A.P = $5; Q = 10.
B.P = $10; Q = 100.
C.P = $60; Q = 40.
D.P = $20; Q = 300.

Accepted Answer

The answer of (Table: Variable Costs for Lawns) Look at...

Question 3

The short-run industry supply curve is more elastic than the long-run industry supply curve.

Accepted Answer

The answer of The short-run industry supply curve is more...

Question 4

Cindy's Nails operates in the perfectly competitive pedicure industry.The city is considering requiring nail salons to be certified by a health inspector.The certification will cost $1,000 annually and is thus a fixed cost.The certification will affect Cindy's decision to operate, not the number of pedicures she chooses to perform if she operates.

Accepted Answer

Since the certification cost is a fixed cost and does not change with the number of pedicures performed, it will affect Cindy's decision to operate or not, but not her decision on how many pedicures she chooses to perform if she does operate.

Question 5

In the short run, the fixed costs of running a farm should play no role in determining the level of production.

Accepted Answer

In the short run, fixed costs do not vary with the level of production, so decisions about production levels are based on variable costs, not fixed costs.

Question 6

If the Kansas corn market is perfectly competitive, it means there is easy entry into this market.

Accepted Answer

In a perfectly competitive market, there are no barriers to entry or exit, meaning that firms can enter or leave the market easily, resulting in a large number of buyers and sellers. Therefore, if the Kansas corn market is perfectly competitive, there is easy entry into this market. In a perfectly competitive market, there are no barriers to entry, which means that new firms can easily enter and exit the market. Therefore, there is easy entry into the Kansas corn market if it is perfectly competitive.

Question 7

According to the optimal output rule, profits are maximized when firms produce where the difference between marginal revenue and marginal cost is the largest.

Accepted Answer

Profits are maximized when firms produce where marginal revenue equals marginal cost, not where the difference between them is the largest.

Question 8

A perfectly competitive firm's demand curve is perfectly elastic at the market-determined price.

Accepted Answer

A perfectly competitive firm faces a horizontal, perfectly elastic demand curve at the market-determined price, because it is a price taker and cannot influence the price through its own actions. The firm can sell as much output as it wants to at the prevailing market price, but if it tries to charge a higher price, it won't be able to sell any output. In a perfectly competitive market, a firm is a price taker and must accept the market-determined price. Therefore, any increase in price would cause the firm to lose all of its customers to other competitors, and any decrease in price would not significantly increase the firm's sales since there are many other firms offering the same product at the same lower price. This leads the demand curve of a firm in a perfectly competitive market to be perfectly elastic at the market-determined price.

Question 9

A perfectly competitive firm's supply curve is its marginal cost curve above the average variable cost curve.

Accepted Answer

In a perfectly competitive market, firms are price takers and have no market power to influence the price. Therefore, the firm will always produce at the point where its marginal cost (MC) equals the market price. As long as the market price is above the average variable cost (AVC), the firm will continue to operate in the short run. Thus, the supply curve for the firm is the portion of the MC curve that lies above the AVC curve. In perfect competition, a firm produces at the point where marginal cost equals price. As a result, the firm's supply curve is its marginal cost curve above the average variable cost curve because a firm will only produce if the price is above the average variable cost to cover its costs of production.

Question 10

Suppose the beef industry is perfectly competitive and the demand for beef rises.As long as the demand does not subsequently fall, beef producers can expect to earn economic profits in both the short run and the long run.

Accepted Answer

In the short run, beef producers can earn economic profits due to increased demand. However, in the long run, the perfectly competitive market structure ensures that new firms will enter the market, increasing supply until economic profits are driven to zero.

Question 11

In the short run, if a perfectly competitive firm chooses to produce, then its profits are maximized by producing the quantity of output where marginal cost equals marginal revenue.

Accepted Answer

This is the basic rule for profit maximization for a perfectly competitive firm in the short run. This is the basic principle of profit maximization for a perfectly competitive firm in the short run.

Question 12

A market that is in long-run equilibrium must also be in short-run equilibrium.

Accepted Answer

In long-run equilibrium, all factors of production are variable and firms have adjusted to the optimal level of output given the market price. In short-run equilibrium, some factors of production are fixed and firms are producing at a level where marginal cost equals marginal revenue. Therefore, if a market is in long-run equilibrium, it must have also gone through the process of reaching short-run equilibrium at some point.

Question 13

Lawn-mowing service is a perfectly competitive industry.Alex's Lawn Mowing Service should close if Alex expects his long-run economic profits to equal zero.

Accepted Answer

In a perfectly competitive industry, firms can continue to operate in the long run even if they earn zero economic profits, as this means they are covering all their opportunity costs, including normal profit.

Question 14

Microsoft's Windows operating system is a standardized product, since everyone who buys a particular version of the product gets exactly the same thing.This means that Microsoft is a perfectly competitive firm.

Accepted Answer

Microsoft is not a perfectly competitive firm because there are barriers to entry in the operating system market and Microsoft has a significant market share. Additionally, Microsoft can differentiate its product through branding, customer support, and bundled software programs. Microsoft is not a perfectly competitive firm because it has a dominant market position in the operating system industry, and there are significant barriers to entry for new firms to compete with Microsoft. Additionally, Microsoft has the ability to differentiate its operating system with unique features, making it different from its competitors.

Question 15

(Table: Variable Costs for Lawns) Look at the table Variable Costs for Lawns.During the summer Alex runs a lawn-mowing service, and lawn-mowing is a perfectly competitive industry made up of 100 identical firms.The table shows his variable costs for lawn-mowing and the number of lawns mowed.Alex's fixed cost is $1,000 for the mower.His variable costs include fuel, his time, and mower parts.Which of the following is a point on the industry short-run supply curve?
A.P = $5; Q = 100.
B.P = $10; Q = 1,000.
C.P = $40; Q = 1,100.
D.P = $70; Q = 5,000.

Accepted Answer

The answer of (Table: Variable Costs for Lawns) Look at...

Question 16

If a perfectly competitive firm reduces its output, the market price will increase.

Accepted Answer

In a perfectly competitive market, individual firms are price takers, meaning the actions of a single firm do not affect the market price. The market price is determined by the overall supply and demand in the market.

Question 17

The long-run industry supply curve is usually more elastic than the short-run industry supply curve, but if entering firms make intensive use of an input that is in limited supply, then it is possible for the long-run curve to be less elastic than the short-run curve.

Accepted Answer

The answer of The long-run industry supply curve is usually...

Question 18

The market for new drugs is not usually perfectly competitive, since the companies manufacturing these drugs are usually granted patents, and this restricts entry into the industry.

Accepted Answer

Patents granted to pharmaceutical companies create a temporary monopoly on the production and sale of their drugs, restricting entry into the market and reducing competition. Patents restrict entry into the pharmaceutical industry by providing companies with exclusive rights to manufacture and sell their products for a certain period of time, which gives them monopoly power and pricing control.

Question 19

The short-run individual supply curve for a perfectly competitive firm is given by the marginal cost curve above minimum average total cost.

Accepted Answer

The short-run individual supply curve for a perfectly competitive firm is given by the marginal cost curve above the minimum average variable cost, not the average total cost.

Question 20

In the long run, firms will exit an industry if the market price is consistently less than their break-even price.

Accepted Answer

If a firm is consistently unable to cover its costs and earn a profit due to low market prices, it will eventually exit the industry. This is because it is not sustainable for the firm to continue operating at a loss.

Quiz 12: Perfect Competition and the Supply Curve