Question 1

When the firms in a perfectly competitive market are incurring economic losses,some of the firms will exit the market,causing the supply curve to shift left and market price to rise until losses incurred by the remaining firms are eliminated.

Accepted Answer

In a perfectly competitive market, firms are price takers and cannot control the market price. If firms are incurring economic losses, some of them will exit the market, causing a leftward shift in the supply curve. As a result, the market price will increase until the remaining firms' losses are eliminated and they break even. This process will continue until a long-run equilibrium is reached, where firms earn normal profits. Therefore, the statement is true.

Question 2

Assume the price elasticity of supply for grade wheat has been estimated to be +0.82.This means that when the price of wheat increases by 10 percent,the quantity of wheat supplied to the market increases by 82 percent.

Accepted Answer

The price elasticity of supply of +0.82 means that when the price of wheat increases by 10 percent, the quantity of wheat supplied to the market increases by 8.2 percent, not 82 percent.

Question 3

Between 1999 and 2007,the behavior of firms in the trucking industry closely matched the outcome predicted by the model of perfect competition.

Accepted Answer

During this period, the trucking industry experienced significant deregulation, increased competition, and technological advancements, leading to conditions such as many buyers and sellers, similar products, and easy market entry and exit, which closely align with the characteristics of perfect competition.

Question 4

Because two percent of the largest farms grow half of all of the grain in the United States,the grain industry is technically classified as an oligopoly.

Accepted Answer

The classification of an industry as an oligopoly is based on the market structure and the level of competition, not solely on the concentration of production. An oligopoly is characterized by a few companies having significant market power, but the definition does not directly correlate to the percentage of production by farm size.

Question 5

Although an improvement in technology enables perfectly competitive firms to earn a positive economic profit in the short run,entry by new firms will ensure that those profits are eliminated over time.

Accepted Answer

This statement is in line with the theory of perfect competition, which suggests that in the long run, new firms will enter the market and compete away any economic profits that existing firms may have been making in the short run. This process continues until only normal profits are being earned by all firms in the market. Therefore, the statement is true.

Question 6

The estimated price-cost margin of 11.9 percent in the market for broiler chickens in 1992 suggested that there was a high degree of competition in that industry.

Accepted Answer

A price-cost margin of 11.9 percent indicates a relatively low markup over costs, suggesting competitive pricing and a high degree of competition in the market.

Question 7

If firms in a perfectly competitive industry produce an undifferentiated product,it is not possible to increase profits of the individual firms in the industry by increasing market demand for the product because of the large number of available substitutes.

Accepted Answer

In a perfectly competitive market, increasing market demand can lead to higher prices and profits for individual firms, even if the product is undifferentiated, because the market price is determined by supply and demand dynamics.

Question 8

The larger firms in the red-meat industry have blunted the effects of competition by relying on product differentiation,which in effect,creates a downward-sloping demand curve for each firm's product.

Accepted Answer

This statement is true. By differentiating their products, the larger firms are able to create a perceived difference in quality or value for their products, which can result in a more inelastic demand for their product. This gives them some ability to set higher prices without losing as much market share to their competitors.

Question 9

There is an inverse relationship between the price-cost margin and the level of competition in a particular industry.

Accepted Answer

This statement is true. In general, when competition is high in an industry, firms have less market power and are unable to charge higher prices. As a result, profit margins are lower (i.e., the price-cost margin is lower). Conversely, when competition is low, firms may have more market power and be able to charge higher prices, resulting in higher profit margins.

Question 10

High fuel prices and losses by smaller firms have resulted in a considerable amount of consolidation in the trucking industry,which now most closely resembles the oligopoly market structure.

Accepted Answer

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Question 11

Explain why a firm should continue to operate in the short run so long as market price is greater the the firm's average variable cost at the profit-maximizing level of output.

Accepted Answer

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Question 12

When the percentage change in quantity supplied is greater than the percentage change in price,supply is said to be elastic.

Accepted Answer

This statement is true according to the law of supply, which states that as the price of a good or service increases, the quantity supplied also increases. When the percentage change in quantity supplied is greater than the percentage change in price, supply is considered to be elastic, as it is highly responsive to changes in price. This means that small changes in price can lead to relatively larger changes in the quantity supplied. In contrast, if the percentage change in quantity supplied is less than the percentage change in price, supply is considered to be inelastic.

Question 13

What assumptions in the perfect competition model ensure that economic profit is zero in the long run? Explain.

Accepted Answer

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Question 14

Assume the market for a good produced by perfectly competitive firms is currently in equilibrium (economic profit = 0).Now assume there is a decrease in market demand for the good.Analyze the short-run effects of the decrease in demand on equilibrium market price and output.What has happened to the profits of each of the firms in the industry? Over time,what will happen to the number of firms in the industry? Why?

Accepted Answer

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Question 15

When a perfectly competitive market is in long-run equilibrium,price is equal to marginal cost,the individual firm is operating at the minimum of its short-run and long-run average cost curves,and economic profit equals zero.

Accepted Answer

In a perfectly competitive market, firms will produce at a point where price is equal to marginal cost, which occurs at the minimum point of the firm's short-run and long-run average cost curves. In the long run, firms will adjust their production to achieve zero economic profit. Therefore, in long-run equilibrium in a perfectly competitive market, all of these conditions will hold true, making statement A true.

Question 16

Explain why a firm maximizes its profits by producing the level of output at which marginal revenue equals marginal costs.

Accepted Answer

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Question 17

Assume the firms in a perfectly competitive market are initially incurring economic losses.An increase in supply would cause existing firms' economic losses to decrease.

Accepted Answer

An increase in supply would actually cause existing firms' economic losses to increase, as the market price would decrease due to the excess supply. This would lead to a larger gap between the market price and the firms' average total cost, resulting in larger economic losses.

Question 18

Summarize the characteristics of a perfectly competitive market.

Accepted Answer

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Question 19

Assume there is a decrease in the supply of a product produced in a perfectly competitive market.All else constant,in the short run this will cause the profits of firms that produce substitutes for the good in question to increase.

Accepted Answer

A decrease in supply of a product in a perfectly competitive market will result in an increase in the market price of the product. This increase in price will lead to an increase in profits for firms producing substitutes for the good in question, as consumers who are unable to purchase the original product will turn to substitutes instead. However, in the long run, new firms may enter the market and increase competition, bringing prices back down and reducing profits.

Question 20

Because of the large number of firms that operate in the agricultural industry,the supply of agricultural products is inelastic over the entire range of output.

Accepted Answer

The supply of agricultural products is generally considered elastic due to the large number of firms in the industry, which means that the quantity supplied can change significantly in response to price changes. However, in the short term, factors like growing seasons and fixed amounts of arable land can make supply inelastic.

Quiz 7: Market Structure: Perfect Competition