Question 1

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

The answer of In the long run,perfectly competitive firms earn...

Question 2

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 decreasing-cost industry, as the industry grows and more firms enter, production costs decrease due to economies of scale, causing the equilibrium price to fall despite increased demand. This is consistent with the observed decrease in personal computer prices despite increased demand.

Question 3

When firms exit a perfectly competitive industry,the market supply curve shifts to the left.

Accepted Answer

When firms exit a perfectly competitive industry, the number of firms decreases, resulting in a decrease in the overall supply in the market. This shift of supply curve to the left leads to an increase in the market price.

Question 4

Figure 9-19
 
-Refer to Figure 9-19.The figure above shows the cost curves of a perfectly competitive firm in the coffee market.Use the graph in Figure 9-19 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 9-19
 
-Refer to Figure 9-19.The figure...

Question 5

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

Accepted Answer

The optimal scale of production from society's viewpoint is the minimum efficient scale because at this point, the firm produces at the lowest unit cost, which leads to lower prices for consumers and higher output for society. As the long-run average cost curve is U-shaped, the minimum efficient scale is located at the bottom of the curve where the firm achieves economies of scale. Thus, this point is considered the optimal scale from society's viewpoint.

Question 6

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

Accepted Answer

Productive efficiency refers to the situation in which a good or service is produced at the lowest possible cost. This means that resources are being used in the most efficient way to maximize output and minimize costs. Allocative efficiency refers to the situation in which resources are allocated in the most efficient way to maximize social welfare, which may not necessarily result in the lowest possible cost of production. Marginal efficiency refers to the change in output resulting from a change in input, and profit maximization refers to the situation in which a firm maximizes its profits by producing at a level of output where marginal revenue equals marginal cost.

Question 7

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 occurs when resources are allocated in a way that maximizes the net benefit to society as a whole. In this situation, every good or service is produced up to the point where the marginal benefit to consumers equals the marginal cost of producing it. This ensures that society is getting the most value possible from the resources being used.

Question 8

Figure 9-20
 
-Refer to Figure 9-20.If the market price is P₁,what is the allocatively efficient output level?

Accepted Answer

Allocative efficiency occurs where marginal cost equals marginal benefit, which is at Q₁ in this graph. At this output level, the market price P₁ is equal to the marginal cost, and there is no other output level where the welfare of consumers and producers is maximized. Therefore, Q₁ is the allocatively efficient output level.

Question 9

Assume that the LCD and plasma 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 profit significantly due to the successful innovation that lowers its cost of production. However, in the long run, other firms will also innovate and copy the innovation, eliminating the temporary increase in profit and leading to lower profits for all firms in the industry as a result of increased competition. Thus, while the innovation may lead to temporary profitability, it will not provide sustainability for the firm in the long run.

Question 10

What is productive efficiency?

Accepted Answer

Productive efficiency is achieved when goods are produced at the lowest possible cost. This means that resources are being allocated efficiently and wastage is minimized, resulting in optimal production. Option A is incorrect as it only considers profit, not cost efficiency. Option C is describing allocative efficiency, not productive efficiency. Option D is incorrect as producing as much as possible does not necessarily mean producing efficiently.

Question 11

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 12

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 13

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

The most likely reason for Pioneer and JVC to cut prices is intense competition between them. If one firm raised its prices, it would risk losing customers to the other. Therefore, both firms may have felt compelled to cut prices to remain competitive in the market.

Question 14

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

Accepted Answer

The answer of What is meant by the term "long-run...

Question 15

What is allocative efficiency?

Accepted Answer

Allocative efficiency refers to a situation where resources are allocated in the most economically efficient way, meaning that production reflects consumer preferences and resources are allocated such that the marginal benefit to consumers is equal to the marginal cost of producing it. This ensures that resources are used in the most efficient way and that the economy is functioning optimally. Option A refers to profit maximization, which may not always result in allocative efficiency. Option B refers to a situation where goods are produced at the lowest cost, but this doesn't always lead to allocative efficiency. Option D refers to distributional fairness rather than efficiency.

Question 16

A perfectly competitive industry achieves allocative efficiency because

Accepted Answer

Allocative efficiency means that resources are allocated in a way that maximizes social welfare or the satisfaction of society's wants and needs. In a perfectly competitive industry, goods and services are produced up to the point where the marginal benefit to consumers (measured by the market price they are willing to pay) is equal to the marginal cost of production (the cost of producing one more unit of output). This ensures that production is focused on the goods and services that consumers value the most relative to their cost of production, maximizing overall welfare. A and C are partially correct, but do not capture the full picture of allocative efficiency in a competitive market. D is incorrect as production surpluses would indicate inefficiency, not efficiency.

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

The answer of Writing in the New York Times on...

Question 18

Figure 9-18
 
-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 9-18
 
-Use the figure above to...

Question 19

The perfectly competitive market structure benefits consumers because

Accepted Answer

In a perfectly competitive market, firms are forced to be as efficient as possible in order to remain competitive. This leads to lower prices, higher quality goods, and more choices for consumers. Therefore, the best choice is B.

Question 20

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

The answer of Why would a company continue to operate...

Quiz 9: Firms in Perfectly Competitive Markets