Question 1

One explanation for the existence of an increasing-cost industry is that

Accepted Answer

As the industry expands, prices are bid up for some factors of production, leading to an increase in the average cost of production for all firms in the industry.

Question 2

What happens in a decreasing-cost industry when some firms leave and the industry's output contracts?

Accepted Answer

In a decreasing-cost industry, as firms leave and output contracts, the average cost of production increases because the benefits of economies of scale are reduced.

Question 3

An industry that has increasing returns to scale and fixed factor prices will have a long-run supply curve that is

Accepted Answer

In an industry with increasing returns to scale, as production increases, the average cost of production decreases. This leads to a downward-sloping long-run supply curve because firms can produce more at a lower cost, encouraging them to supply more at lower prices.

Question 4

When a purely competitive industry is in long-run equilibrium, which statement is true?

Accepted Answer

In long-run equilibrium, a purely competitive industry will produce output at the minimum point on its average total cost curve, where price and average total cost are equal. This is because firms that are unable to produce at this level will exit the industry in the long run, driving down the supply and increasing the price until it reaches the equilibrium level where price equals average total cost. Marginal cost and marginal revenue will also be equal to price at this point. Therefore, option B is the correct answer.

Question 5

If there is a decrease in demand for a product in a purely competitive industry, it results in an industry contraction that will end when the product price is

Accepted Answer

In a purely competitive industry, firms cannot control the price of the product and must accept the market price, which is determined by the intersection of supply and demand. When there is a decrease in demand, the market price will fall below the previous equilibrium price, resulting in a temporary excess supply. This will put pressure on firms to lower their prices to attract customers, which will continue until the price falls to the level of marginal cost. At this price, firms will earn zero economic profit, and no entry or exit will occur. Thus, the industry contraction will end when the product price is equal to its marginal cost.

Question 6

Assume a purely competitive constant-cost industry is initially at long-run equilibrium. Now suppose that a decrease in demand occurs. After all the long-run adjustments have been completed, the new equilibrium price

Accepted Answer

In a constant-cost industry, the long-run supply curve is perfectly elastic. After a decrease in demand, firms exit the market, reducing industry output, but the price returns to the initial level.

Question 7

An industry is producing at the least-cost rate of production when

Accepted Answer

The least-cost rate of production is achieved when price and the minimum average cost are equal. This is because producing at this level ensures that the firm is minimizing the cost of production while still earning enough revenue to cover these costs. If the firm were to produce more, the average cost would increase, and they would be producing at a higher cost than necessary. Similarly, if they were to produce less, they would not be earning enough revenue to cover their costs. Therefore, C is the correct choice.

Question 8

Which statement is correct? The long-run supply curve for a purely competitive

Accepted Answer

In an increasing-cost industry, the long-run supply curve will be upward-sloping. This is because as demand for the product increases, firms will need to use less efficient production methods, causing costs to increase and leading to higher prices in the long run. The long-run supply curve will be less elastic than the short-run supply curve because in the long run, firms have more time to adjust their production methods and inputs, making it more difficult to increase output quickly without incurring higher costs.

Question 9

The long-run supply curve would be upward-sloping if

Accepted Answer

The answer of The long-run supply curve would be upward-sloping...

Question 10

A long-run supply curve that is downward-sloping indicates that the firms' ATC curves

Accepted Answer

A downward-sloping long-run supply curve suggests that as the industry expands, firms experience economies of scale, leading to lower average total costs (ATC).

Question 11

Which of the following statements is true for a long-run supply curve that slopes upward?

Accepted Answer

An upward-sloping long-run supply curve indicates that the costs of production increase as output increases. Therefore, if total market output is increased, unit costs of production will also increase.

Question 12

In long-run equilibrium, a purely competitive firm will operate where price is

Accepted Answer

In long-run equilibrium, a perfectly competitive firm will operate where price is equal to marginal revenue (MR), marginal cost (MC), and minimum average total cost (ATC). This is because in a perfectly competitive market, firms are price takers and must accept the market price determined by the intersection of the supply and demand curves. If the price exceeds the firm's average total cost (ATC), the firm will earn profits and new firms will enter the market, increasing supply and driving the price down. If the price falls below the ATC, firms will incur losses and some firms will exit the market, decreasing supply and driving the price up. Therefore, in the long run, firms in a perfectly competitive market will earn only normal profits, where price is equal to MR, MC, and minimum ATC.

Question 13

Assume a purely competitive decreasing-cost industry is initially in long-run equilibrium but then there is a decrease in market demand for the product. After all economic adjustments to this new situation have taken place, product price will be

Accepted Answer

The answer of Assume a purely competitive decreasing-cost industry is...

Question 14

Allocative efficiency occurs when the

Accepted Answer

Allocative efficiency occurs when marginal cost (MC) equals marginal benefit to society (MB), which means that society is producing and consuming the optimal quantity of a good or service. Option A and B are related to profit maximization for the firm, which may not lead to allocative efficiency. Option D is also not correct, as marginal revenue does not necessarily equal marginal benefit to society.

Question 15

An industry where a change in the number of firms does not affect the prices of the resources used in the industry will have a long-run supply curve that is

Accepted Answer

In an industry where the entry or exit of firms does not affect resource prices, the long-run supply curve is horizontal, indicating constant costs and prices regardless of the industry's output level.

Question 16

If the long-run supply curve is upward-sloping, it indicates that resource prices fall when

Accepted Answer

The answer of If the long-run supply curve is upward-sloping,...

Question 17

Productive efficiency refers to

Accepted Answer

Productive efficiency concerns producing goods and services with the minimum possible cost. At the efficient scale of production, the price equals the minimum average total cost (ATC). Thus, the correct answer is A, where P = minimum ATC. B refers to allocative efficiency, C deals with profit maximization, while D has no relation to efficiency.

Question 18

The long-run market supply curve would be downward-sloping if the representative firms'

Accepted Answer

The long-run market supply curve is downward-sloping if the ATC (average total cost) curves shift down as the industry expands. This is because as the industry expands, costs of production decrease due to economies of scale. This allows firms to produce at lower costs and offer goods at lower prices, which leads to an increase in supply. Therefore, the long-run market supply curve is downward sloping due to the decrease in costs of production with an increase in industry size.

Question 19

Allocative efficiency means that

Accepted Answer

Allocative efficiency means that resources are allocated in a way that aligns with consumer preferences, meaning that goods and services that people value most are produced. It is not necessarily about producing at the lowest cost, selling at a certain price, or only producing goods with marginal benefit exceeding marginal cost.

Question 20

Which would indicate that a firm is operating under conditions of pure competition and is being productively efficient?

Accepted Answer

In a perfectly competitive market, firms will produce at the minimum of average total cost in the long run to achieve productive efficiency. A is incorrect because a firm would not make economic profits in the long run in a perfectly competitive market as the market price is determined by the intersection of supply and demand. B is incorrect because in the long run, firms must cover all of their costs including fixed costs, so marginal cost equaling average variable cost would not imply productive efficiency. D is also incorrect because in a perfectly competitive market, the marginal revenue curve is a horizontal line, and is equal to average revenue.

Quiz 11: Pure Competition in the Long Run