Question 1

When a perfectly competitive market has fully adjusted to demand and supply conditions,all of the following are true except:

Accepted Answer

The answer of When a perfectly competitive market has fully...

Question 2

Industry Y is a perfectly competitive industry.Assume that as a result of changes in other markets there is a twenty percent increase in the price of variable inputs used by firms in industry Y.After all adjustments have taken place,we would expect the equilibrium price in industry Y to:

Accepted Answer

In a perfectly competitive industry, an increase in the price of variable inputs would raise the costs of production for all firms. This would lead to a decrease in supply as firms reduce output or exit the market, causing the equilibrium price to increase. With higher costs and prices, less efficient firms may not be able to cover their costs, leading to a decrease in the number of firms in the industry.

Question 3

Assume goods X and Y are complements and are produced in perfectly competitive markets.All else constant,an increase in demand for good X would cause:

Accepted Answer

Since goods X and Y are complements, an increase in demand for good X would naturally lead to an increase in demand for good Y. In a perfectly competitive market, this increased demand for good Y would make the production of good Y more profitable, potentially attracting more firms to enter the market and produce good Y.

Question 4

Assume that goods X and Y are substitutes and are produced in perfectly competitive markets.All else constant,in the short run,a decrease in the supply of good X would cause:

Accepted Answer

When the supply of good X decreases, its price will increase, causing consumers to switch to the substitute good Y. This will increase demand for good Y.

Question 5

Which of the following statements regarding the agricultural industry is correct?

Accepted Answer

While the agricultural industry has become more concentrated, it is still a competitive industry. There are still many small and independent farmers as well as larger corporate farms. Additionally, farmers must compete with each other for access to resources such as land and labor, as well as for customers to sell their products to. Therefore, option D is correct. Options A, B, and C are incorrect as they either overestimate the level of consolidation and lack of competition in the industry or provide incorrect information about the dominance of large corporate farms.

Question 6

Suppose a perfectly competitive firm,which is initially in long-run equilibrium experiences a decrease in the wages it must pay its employees.In the short run,which of the following will occur?

Accepted Answer

A decrease in wages reduces both the average total cost (ATC) and the marginal cost (MC) for the firm, as labor is a component of both costs. This reduction in costs allows the firm to earn a positive economic profit in the short run, as its costs are lower while prices remain the same.

Question 7

Assume the firms in a perfectly competitive industry are initially in long-run equilibrium and the cost of labor increases.How will the market adjust over time?

Accepted Answer

When the cost of labor increases, firms' costs rise, leading to losses at the current price. To eliminate these losses, some firms will exit the market, reducing supply. This reduction in supply causes the price to rise until firms are no longer experiencing losses, restoring long-run equilibrium.

Question 8

What is the "most efficient capacity" for the perfectly competitive firm?

Accepted Answer

The most efficient capacity for a perfectly competitive firm is the plant size at which long-run average cost (LRAC) is at its minimum, indicating the most cost-efficient scale of operation.

Question 9

If farmers operating in the competitive wheat industry are incurring losses,and are not kept in business with government subsidies,which of the following will result?

Accepted Answer

If farmers are incurring losses without government subsidies, it is a sign that their production is inefficient and not competitive in the market. In the long run, resources will be reallocated out of the wheat industry and towards more productive uses. This will help to improve the overall efficiency of the economy and result in higher economic growth. Prices and quantities produced in the industry may change in the short term, but in the long term, the market will adjust to the new equilibrium. The other answer choices are not likely to occur as they do not represent the natural response of the market to a loss-making industry.

Question 10

Assume there is an increase in demand in a perfectly competitive market that was initially in long-run equilibrium.Which of the following statements is false?

Accepted Answer

When there is an increase in demand in a perfectly competitive market that is initially in long-run equilibrium, the price will rise in the short run, leading to higher profits for firms. However, as new firms enter the market in the long run, the market supply curve will shift right, leading to lower prices and normal profits in the long run. Therefore, profits will be higher than normal in the short run, not lower.

Question 11

Assume that there is an improvement in the technology used by firms in a perfectly competitive industry that is initially in long-run equilibrium.In the short run this would cause:

Accepted Answer

An improvement in technology reduces production costs for firms, leading to increased economic profits in the short run as firms can sell their products at the same market price while incurring lower costs.

Question 12

Suppose a perfectly competitive firm is in long-run equilibrium and there is a decrease in demand.Suppose also that the firm operates in an industry in which the prices of productive inputs vary with the level of output,increasing when output increases and decreasing when output decreases.Which of the following will occur at the new long-run equilibrium?

Accepted Answer

In a decreasing-cost industry, a decrease in demand leads to a lower price in the new long-run equilibrium because input prices decrease as output decreases, reducing costs and allowing firms to supply at a lower price.

Question 13

Assume the firms in a perfectly competitive industry are initially in long-run equilibrium and the cost of labor increases.In the short run,this will cause firms in the industry to:

Accepted Answer

An increase in the cost of labor will raise the firms' marginal cost curve, leading to a lower quantity produced and a higher price. However, since the increase in cost affects all firms uniformly, the market price will not change in the short run. As a result, firms will still earn zero economic profit in the short run, but will incur losses due to the higher cost of labor. Therefore, the firms will reduce output and incur a loss.

Question 14

Which of the following is not a characteristic of the broiler chicken industry?

Accepted Answer

The broiler chicken industry is characterized by a few large firms that can influence market prices, unlike perfectly competitive markets where individual firms cannot influence prices.

Question 15

Industry X,which is perfectly competitive,is in long-run equilibrium.Assume a new law is passed that requires employers in industry X to provide health insurance to previously uninsured employees.As a result of this new requirement we would expect to observe:

Accepted Answer

The requirement of providing health insurance to previously uninsured employees will increase the cost of production for employers in industry X. As a result, the supply of goods in the market will decrease, leading to a decrease in total output. However, the demand for the product in the market will remain the same, leading to an increase in price. Therefore, we can expect an increase in price and a decrease in total output in industry X.

Question 16

As the level of competition in an industry increases,the price-cost margin approaches:

Accepted Answer

As competition in an industry increases, firms are forced to lower their prices to remain competitive. This leads to a decrease in the price-cost margin, which is the difference between the price of a product and the cost of producing it. In a perfectly competitive industry, the price-cost margin would approach zero, as firms are unable to charge a higher price than their competitors without losing market share. Therefore, option A is the correct choice.

Question 17

Assume that goods X and Y are substitutes and are produced in perfectly competitive markets.If there is a decrease in the supply of good X,which of the following will happen in the market for good Y in the long run?

Accepted Answer

Since X and Y are substitutes, a decrease in the supply of X will increase the demand for Y. This will cause an increase in the price of Y in the short run, leading to higher profits for existing firms. However, in the long run, this will attract new firms to enter the market for Y, increasing its supply and causing the price to fall back down to the original level. Therefore, firms will enter, causing market price to fall.

Question 18

Which of the following statements regarding the trucking industry is correct?

Accepted Answer

The statement that the recession of 2007-2009 caused many trucking firms to exit with many firms filing for bankruptcy is correct. The trucking industry was hit hard by the recession, as many firms were unable to sustain their operations due to low demand and rising fuel costs.

Question 19

The term "industry concentration":

Accepted Answer

Industry concentration is a measure of how many firms produce the total output of an industry. It is often measured using the concentration ratio, which calculates the percentage of total output produced by the top firms in the industry.

Question 20

Assume a perfectly competitive firm is in long-run equilibrium and there is a decrease in market demand for the firm's output.Which of the following will occur?

Accepted Answer

In a perfectly competitive market, a decrease in market demand will lead to a decrease in market price. As a result, firms will face a lower price for their product. In the short run, firms will not be able to adjust their production processes to reduce costs, so they will be forced to reduce their output to a level where marginal cost equals the new market price. This means that existing firms will reduce output in the short run. In the long run, due to the lower market price, some firms may exit the market, which will shift the market supply curve to the left, and the market price will eventually settle at a level where all firms are perfectly competitive again.

Quiz 7: Market Structure: Perfect Competition