Question 1

In an increasing-cost industry,the long-run supply curve is upward sloping.

Accepted Answer

In an increasing-cost industry, the marginal cost of production increases as more firms enter the market and resources become scarcer. This results in an upward sloping long-run supply curve as the price needed to maintain production increases.

Question 2

If in the long run a firm makes zero profit,it should exit the industry.

Accepted Answer

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Question 3

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?
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Accepted Answer

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Question 4

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

Accepted Answer

When a firm exits a perfectly competitive industry, it reduces the total supply in the market, causing the market supply curve to shift to the left. This results in a higher equilibrium price for the remaining firms in the market.

Question 5

After an increase in demand in a constant-cost industry,firms will find themselves with higher average cost curves.

Accepted Answer

In a constant-cost industry, an increase in demand will not affect the firms' average cost curves as the cost of production remains the same. Therefore, firms will not face higher average costs in this scenario.

Question 6

Competition has driven the economic profits in the video rental business to zero.Surya Bacha,who owns a video rental business,would be better off leaving the industry for another alternative.

Accepted Answer

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Question 7

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 output increases, production costs decrease and firms can pass these savings onto consumers in the form of lower prices. The fact that the price of personal computers has fallen despite an increase in demand suggests that this industry is experiencing decreasing costs, and therefore is likely to be perfectly competitive.

Question 8

A firm would decide to shut down if its production resulted in

Accepted Answer

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Question 9

What is meant by the term 'long-run competitive equilibrium'?
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Accepted Answer

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Question 10

Suppose there are economies of scale in the production of a specialised memory chip that is used in manufacturing microwaves.This suggests that the microwave industry is a decreasing-cost industry.

Accepted Answer

Economies of scale mean that the cost of production decreases as the level of output increases. In a decreasing-cost industry, the cost of producing a good decreases as the industry grows. Therefore, if there are economies of scale in the production of the specialised memory chip, it implies that as more microwaves are produced, the cost of producing each microwave will decrease, making it a decreasing-cost industry.

Question 11

A perfectly competitive firm in a constant-cost industry produces 1000 units of a good at a total cost of $50 000.If the prevailing market price is $48,the number of firms and the industry's output will decrease in the long run.

Accepted Answer

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Question 12

Assume that a perfectly competitive market is in long-run equilibrium.Suppose as a result of a health hazard associated with the industry's product,demand decreases drastically.The immediate result of this event is:

Accepted Answer

As demand decreases, the market price falls (due to excess supply) and the typical firm suffers an economic loss as its revenue falls below its average total cost. In this scenario, there is no indication that market supply has increased to offset the fall in demand, nor are there any changes to the firm's cost curves.

Question 13

If,as a perfectly competitive industry expands,it can supply larger quantities at the same long-run market price,it is

Accepted Answer

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Question 14

What characteristic of a competitive market has made the 'long run pretty short' in the market for iPhone applications?

Accepted Answer

The ease of entry into the market for iPhone applications has made the long run pretty short. With low barriers to entry, new firms can easily enter the market and offer competing applications, pushing out older, less popular ones. This means that the market is constantly changing, making it difficult for any one application to maintain a dominant position for very long.

Question 15

What is a long-run supply curve? What does a long-run supply curve look like on a perfectly competitive market graph?
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Accepted Answer

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Question 16

In a decreasing-cost industry,the entry of new firms lowers average cost at each level of output.

Accepted Answer

In a decreasing-cost industry, new firms entering the market can benefit from economies of scale and can reduce the cost of production, leading to lower average costs at each level of output. This is because as the industry grows, there is increasing availability of specialized labor and equipment, better access to raw materials, and improved technology, which can help to reduce costs. This, in turn, can lead to increased competition and lower prices for consumers, making the industry more attractive for new firms to enter.

Question 17

Assume that firms in a perfectly competitive market are earning economic profits.The statement which describes the change in market price and output as a result of the entry of new firms into this market is:

Accepted Answer

When new firms enter a perfectly competitive market and start producing, the supply curve of the market shifts to the right. As a result, the equilibrium price of the product falls, and the market output increases. This happens because the new firms increase the total supply available, which causes the price to adjust downwards towards the minimum point of the average total cost curve for each firm. Thus, in this case, the short-run market supply curve shifts to the right, causing price to fall and total market output to increase.

Question 18

A firm could continue to operate for years without ever earning a profit as long as it is producing an output where

Accepted Answer

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Question 19

Ethan Nicholas,who developed the iShoot application for the iPhone 3G,found that to maintain sales in a profitable competitive market,the price of a product

Accepted Answer

Ethan Nicholas found that to maintain sales in a competitive market, he had to lower the price of the iShoot application. This suggests that the price of a product will usually fall to remain competitive.

Question 20

If a firm in a perfectly competitive industry experiences persistent losses,what should it do in the long run?

Accepted Answer

In the long run, a firm in a perfectly competitive industry that experiences persistent losses should exit the industry. This is because in the long run, all firms in a perfectly competitive industry will earn zero economic profit due to freedom of entry and exit. If a firm is consistently making losses, it means that it is unable to cover its average total cost of production, and continuing to operate will only result in further losses. Therefore, the best choice for the firm is to exit the industry.

Quiz 7: Firms in Perfectly Competitive Markets