Question 1

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 2

Figure 12-19
 
-Refer to Figure 12-19.The figure above shows the cost curves of a perfectly competitive firm in the coffee market.Use the graph in Figure 12-19 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 12-19
 
-Refer to Figure 12-19.The figure...

Question 3

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

Accepted Answer

Productive efficiency occurs when a good or service is produced at the lowest possible cost. It means that resources are not wasted and are being used in the most efficient way possible to produce the good or service.

Question 4

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 economic profits as it can lower its production costs with the successful innovation. However, in the long run, other firms in the industry will also copy the innovation and the market supply will increase, causing the price to drop. As a result, the economic profits of the firm will be eliminated, although it can still earn normal profits. Therefore, the best option is D.

Question 5

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. This is achieved when 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. In other words, no additional benefit can be gained from producing more, and no resources are wasted by producing less. This is the ideal outcome for a market economy.

Question 6

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

Accepted Answer

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

Question 7

Figure 12-18
 
-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 12-18
 
-Use the figure above to...

Question 8

A perfectly competitive industry achieves allocative efficiency because

Accepted Answer

In a perfectly competitive industry, goods and services are produced up to the point where the last unit provides a marginal benefit to consumers equal to the marginal cost of producing it. This is known as allocative efficiency, where resources are allocated in a way that maximizes social welfare. When marginal benefit equals marginal cost, the industry as a whole is producing the optimal level of output, and any deviation from that point would result in a loss of efficiency. Therefore, option B is the correct answer. Options A and D are incorrect because producing at the lowest possible cost or carrying production surpluses do not necessarily lead to allocative efficiency. Option C is partially correct, but it only describes the condition for perfect competition, not the achievement of allocative efficiency.

Question 9

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, an increase in demand results in a decrease in the average cost of production, which leads to a lower price for consumers. The fact that prices of personal computers have fallen despite an increase in demand suggests that the industry is operating under decreasing costs, which is indicative of a perfectly competitive market structure.

Question 10

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 intense competition between Pioneer and JVC likely pushed prices down, and each was probably afraid of losing customers to the other if it raised prices. Therefore, they both had to cut prices to remain competitive.

Question 11

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 12

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 13

The perfectly competitive market structure benefits consumers because

Accepted Answer

In a perfectly competitive market, firms are forced to be as efficient as possible due to the high level of competition. This leads to lower prices for consumers and a more efficient allocation of resources. While firms may not necessarily produce goods at the lowest possible price in the long run, they are still incentivized to keep prices low in order to compete. Firms in this structure may also not necessarily produce high-quality goods, as quality may not be the only determining factor for consumers when choosing between competitors.

Question 14

A perfectly competitive industry achieves allocative efficiency in the long run.What does allocative efficiency mean?

Accepted Answer

Allocative efficiency occurs when resources are allocated in a way that maximizes society's satisfaction, meaning that each firm produces up to the point where the price of the good equals the marginal cost of producing the last unit. This ensures that consumers are paying the lowest possible price for the product and that resources are being used efficiently. Options B, C and D do not fully capture the concept of allocative efficiency.

Question 15

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...

Question 16

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...

Question 17

Figure 12-20
 
-Refer to Figure 12-20.If the market price is P₁, what is the allocatively efficient output level?

Accepted Answer

Allocative efficiency occurs when the price equals the marginal cost, which is achieved at the output level Q₁. At Q₂, the marginal cost is greater than the price, indicating an overproduction, and at Q₀, the marginal cost is less than the price, indicating an underproduction. However, at Q₁, the price equals the marginal cost, indicating an efficient allocation of resources.

Question 18

What is productive efficiency?

Accepted Answer

Productive efficiency occurs when resources are allocated to produce goods at their lowest possible average cost. This means that the economy is producing the maximum output possible with its available resources. This is also known as allocative efficiency, as resources are being allocated in the most efficient manner. Choice A is referring to allocative efficiency, not productive efficiency. Choice C is referring to marginal analysis, which is used to determine how much to produce rather than how to produce it efficiently. Choice D is simply wrong, as producing "as much as possible" does not necessarily lead to productivity efficiency.

Question 19

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

Accepted Answer

The U-shape of the long-run average cost curve indicates that a firm experiences economies of scale up to a certain level of production, and then diseconomies of scale beyond that point. Therefore, the optimal scale of production from society's viewpoint is at the minimum efficient scale, which is the point where a firm achieves the lowest unit cost of production and produces at the most efficient scale. This will minimize the cost of production per unit and maximize the benefits to both the firm and the society.

Question 20

What is allocative efficiency?

Accepted Answer

Allocative efficiency refers to a situation in which resources are allocated such that the last unit of output produced provides a marginal benefit to consumers equal to the marginal cost of producing it. This means that there is no wasted production or underproduction of goods and services, and all resources are allocated optimally to meet the demand of consumers.

Quiz 12: Firms in Perfectly Competitive Markets