Question 1

The competitive market process tends to promote economic prosperity because it
A) keeps the prices of goods higher than their production costs.
B) creates inefficiencies, which causes people to economize.
C) directs self-interested action toward the production of goods that are highly valued relative to their cost.
D) sends signals to the government about which goods to produce.

Accepted Answer

The competitive market process incentivizes firms to produce goods that are highly valued relative to their cost, which creates economic prosperity through the production of goods that consumers desire. This process also promotes efficiency in production, leading to lower costs and prices for consumers. Choices A and D are incorrect because the market process does not keep prices artificially high, nor does it direct government action. Choice B is incorrect because although individuals may economize in a competitive market, creating inefficiencies is not a desirable outcome.

Question 2

The competitive price-taker model is usually used to illustrate the competitive process. If firms cannot choose their price, where is the competition?

Accepted Answer

The answer of The competitive price-taker model is usually used...

Question 3

In some industries, like insurance, both small and very large firms coexist and compete quite effectively in the market. This indicates that the long-run average total cost curve in these industries
A) is "U" shaped.
B) is downward sloping over all levels of output.
C) exhibits constant returns to scale over a wide range of output.
D) exhibits diseconomies of scale beginning at a low rate of output.

Accepted Answer

The coexistence and effective competition of both small and large firms in industries like insurance indicate that the long-run average total cost curve exhibits constant returns to scale over a wide range of output. This means that increasing the scale of production does not lead to a significant increase in costs or decrease in efficiency for either small or large firms.

Question 4

Regarding costs of production, can a firm ever be at a point that is not on the marginal cost curve? Explain.

Accepted Answer

The answer of Regarding costs of production, can a firm...

Question 5

When the demand for a product falls, why do costs of production go down in an increasing cost industry?

Accepted Answer

The answer of When the demand for a product falls,...

Question 6

When a competitive price-taker market is in long-run equilibrium
A) the firms in the market will earn zero economic profit.
B) the average total cost of the firms in the market will be minimized.
C) every unit of the relevant good that is valued more than its opportunity costs will be produced and sold.
D) all of the above are correct.

Accepted Answer

In a long-run competitive price-taker market, firms will earn zero economic profit because if they were earning above-normal profits, new firms would enter the market and competition would drive prices down until profits were zero. Additionally, firms will produce at their minimum average total cost, which will be where marginal cost equals average total cost, ensuring that every unit produced is valued more than its opportunity cost. Therefore, all of the statements in A, B, and C are correct.

Question 7

If the demand for pizza falls, pizza suppliers will suffer economic losses, and some firms will leave the industry. Why is this considered good? Shouldn't we feel sorry for these business owners?

Accepted Answer

The answer of If the demand for pizza falls, pizza...

Question 8

If the model of price-taking firms is so unrealistic and restrictive, why study it?

Accepted Answer

The answer of If the model of price-taking firms is...

Question 9

Amy runs a business in a market where all firms are price takers. Bill suggests that she lower her price to attract even more business. Should Amy follow Bill's suggestion, or should she even consider raising her price?

Accepted Answer

The answer of Amy runs a business in a market...

Question 10

In a competitive price taker market, a firm's short-run supply curve is its
A) average total cost curve above its average variable cost curve.
B) marginal cost curve above its average variable cost curve.
C) marginal cost curve above its average fixed cost curve.
D) entire marginal cost curve.

Accepted Answer

In a competitive price taker market, firms are assumed to have no market power and must accept the market price. Therefore, their short-run supply curve is equivalent to their marginal cost curve above their average variable cost curve, as they will only produce and supply output if the price they receive is greater than or equal to their variable costs. The other options do not accurately describe a firm's short-run supply curve in a competitive price taker market.

Question 11

Tom, a math major, examines Jane's economics class notes and observes that when price-taking firms earn economic profit, they do not seem to produce a quantity that minimizes their costs. Is he correct? Is there significance to this observation?

Accepted Answer

The answer of Tom, a math major, examines Jane's economics...

Question 12

In a competitive market, profit can be considered a reward to businesses that
A) produce a good that consumers value more highly than its component resources.
B) reduce the value of resources used as inputs in production.
C) prohibit rival firms from entering the market and competing.
D) control costs, rather than following the wishes of consumers when deciding what products to produce.

Accepted Answer

In a competitive market, businesses that produce a good that consumers value more highly than its component resources will have an advantage over their competitors, leading to higher sales and profits. This is because consumers are willing to pay more for a product if they perceive that it has a higher value than its cost of production. Therefore, profit can be considered a reward for creating value for consumers in a competitive market.

Question 13

"I'm losing money, but having invested so much in equipment, I simply cannot afford to shut down." If the firm were attempting to maximize profit, this decision may be
A) correct if the firm is covering its fixed costs.
B) incorrect because a firm experiencing economic losses should never continue to operate.
C) correct if the firm is covering its variable costs and expects the price of its product to rise in the near future.
D) incorrect since the firm's fixed costs are sunk costs.

Accepted Answer

If the firm is covering its variable costs and expects the price of its product to rise in the near future, it may be rational for the firm to continue operating in the short run since it may be able to cover its fixed costs and earn some contribution toward those costs. Additionally, if the firm already has a significant investment in equipment, it may be difficult or costly to shut down the operation and liquidate the assets. Therefore, the decision to continue operating may be the best short-term option for the firm, even if it is losing money currently.

Question 14

Why is it considered "ideal" for price to just equal marginal cost?

Accepted Answer

The answer of Why is it considered "ideal" for price...

Question 15

If a technological advance lowers a firm's production costs, why do prices typically fall? Shouldn't the firm maintain the same price and earn economic profit?

Accepted Answer

The answer of If a technological advance lowers a firm's...

Question 16

Even if a firm is optimistic about the future, why should it shut down if it cannot cover its variable cost? If it does shut down, are there ramifications not mentioned in the textbook?

Accepted Answer

The answer of Even if a firm is optimistic about...

Question 17

In some industries, like insurance, both small and very large firms coexist and compete quite effectively in the market. This indicates that the long-run average total cost curve in these industries
A) is "U" shaped.
B) is downward sloping over all levels of output.
C) exhibits constant returns to scale over a wide range of output.
D) exhibits diseconomies of scale beginning at a low rate of output.

Accepted Answer

The coexistence and effective competition of small and very large firms in industries like insurance indicate that the long-run average total cost curve exhibits constant returns to scale over a wide range of output. This means that firms are able to increase their output without a significant increase in their average total cost, allowing them to compete effectively regardless of their size.

Quiz 9: Price Takers and the Competitive Process

The competitive market process tends to promote economic prosperity because it

The competitive price-taker model is usually used to illustrate the competitive process. If firms cannot choose their price, where is the competition?

In some industries, like insurance, both small and very large firms coexist and compete quite effectively in the market. This indicates that the long-run average total cost curve in these industries