Question 1

The statement that does not hold true for a perfectly competitive firm in long-run equilibrium is:

Accepted Answer

In long-run equilibrium, a perfectly competitive firm will have zero economic profits (A), minimize average total cost (B), and charge a price equal to marginal cost (C). However, it is not true that marginal cost (MC) will be minimized (D); instead, MC will be equal to the price and average total cost at the profit-maximizing output level.

Question 2

A teenaged babysitter is similar to a firm in a perfectly competitive industry in that,for both,

Accepted Answer

A teenaged babysitter, like a firm in a perfectly competitive industry, faces many other suppliers of similar services. Both have to compete on price and quality to attract customers.

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 is achieved when a good or service is produced at the lowest possible cost, using the most efficient production techniques and technology. This leads to lower prices for consumers and higher profits for producers.

Question 4

The difference between allocative efficiency and productive efficiency in a perfectly competitive market is:

Accepted Answer

The answer of The difference between allocative efficiency and productive...

Question 5

Figure 7.16 -Refer to Figure 7.16.If the market price is P₁,the allocatively efficient output level is -.

Accepted Answer

The answer of Figure 7.16 
-Refer to Figure 7.16.If the...

Question 6

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 profits by lowering its cost of production through the successful innovation. However, in the long run, other firms will also adopt the same or similar innovation and as a result, the industry supply curve will shift downward. This will lead to a lower price for the product and the firm will be able to earn only normal profits. Therefore, the firm will be able to increase its profits temporarily, but in the long run its profits will be eliminated as other firms copy the innovation.

Question 7

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

Intense competition between the two firms is the most likely reason they did not raise their prices. Each firm feared losing customers to the other if it raised its prices.

Question 8

Figure 7.15 
-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-maximising output?
d.What is total revenue at the profit-maximising output?
e.What is the total cost at the profit-maximising output?
f.What is the profit or loss at the profit-maximising 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 maximising quantity?
__________________________________________________________________________________________________________________________________________________________________________________________

Accepted Answer

The answer of Figure 7.15 
-Use the figure above to...

Question 9

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 is achieved when resources are allocated in such a way that 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. This ensures that the maximum level of satisfaction is achieved for consumers and resources are used in the most efficient manner. Productive efficiency refers to a situation where goods and services are produced at the lowest cost possible, while profit maximisation is the goal of firms to maximise their profits. Marginal efficiency is not a standard economic term.

Question 10

Perfectly competitive firms produce up to the point where the price of the good equals the marginal cost of producing the last unit.This condition is referred to as

Accepted Answer

The condition described in the question is allocative efficiency, as it ensures that the resources are allocated in a way that maximizes social welfare. It is the point where the last unit produced is valued by consumers equally to the cost of producing it. This condition is not necessarily indicative of productive efficiency or constant returns to scale, as those concepts refer to the efficiency of the production process itself rather than the allocation of resources. "Perfectly competitive efficiency" is not a commonly used term.

Question 11

The perfectly competitive market structure benefits consumers because

Accepted Answer

In a perfectly competitive market structure, firms are under constant pressure to be as efficient as possible in order to survive the competition. This often results in lower costs of production and lower prices for consumers. Therefore, the benefit to consumers in this market structure is that they have access to goods and services at the lowest possible price.

Question 12

If a perfectly competitive firm achieves productive efficiency,then

Accepted Answer

If a perfectly competitive firm achieves productive efficiency, it means that it is producing the good at the lowest possible cost. This is because productive efficiency occurs when a firm is producing at the point where average total cost is minimized, which means the firm is using its resources as efficiently as possible. In a perfectly competitive market, firms cannot raise their prices to earn an economic profit because there are many other firms selling the same good at the same price. The price of the good is determined by the market demand and supply, and is equal to the benefit consumers receive from consuming the last unit of the good sold. Minimum efficient scale refers to the quantity of output at which a firm can produce at the lowest possible average total cost in the long run, and it may or may not be the same as the output level that achieves productive efficiency.

Question 13

When plasma television sets were first introduced,prices were high and few firms were in the market.Later,economic profits attracted new firms,and the price of plasma televisions fell.This example illustrates

Accepted Answer

The answer of When plasma television sets were first introduced,prices...

Question 14

Productive efficiency is

Accepted Answer

Productive efficiency is achieved when an economy produces goods and services at the lowest possible cost. This means that resources are allocated in a way that minimizes the average cost of producing a given level of output. Therefore, choice (B) is the correct answer.

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

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

Accepted Answer

The optimal scale of production from society's viewpoint is the minimum efficient scale, which is the output level where the long-run average cost is minimized. At this scale, the firm is operating at maximum efficiency, producing at the lowest possible cost, and can sell its products at a competitive price in the market. This benefits both the firm and society as a whole, as it leads to higher profits and lower prices for consumers. Therefore, option A is the best choice. Options B, C, and D are incorrect because they do not take into account the overall welfare of society and focus solely on the profitability of the firm.

Question 17

If productive efficiency characterises a market,

Accepted Answer

Productive efficiency means producing the output at the lowest possible cost, which is achieved by minimizing the average cost of production. This is because firms are producing the output in the most efficient way possible, using the least amount of resources to produce a given quantity of output. This means that the marginal cost of production is also minimized. While firms may be using the best technology available to produce the good, this is not essential for productive efficiency as long as they are using the most efficient methods available. Similarly, producing goods that consumers desire most is not necessarily a defining characteristic of productive efficiency, as firms may produce goods that are in high demand but are not being produced in the most efficient manner.

Question 18

What is allocative efficiency?

Accepted Answer

Allocative efficiency refers to a situation in which resources are allocated in such a way that the last unit of output produced provides a marginal benefit to consumers equal to the marginal cost of producing it. This means that resources are being used in a way that maximizes the overall satisfaction of consumers while minimizing the cost of production. Allocative efficiency is important because it ensures that resources are not being wasted on producing goods and services that do not provide sufficient value to consumers, while also ensuring that scarce resources are being used in the most effective way possible.

Question 19

A perfectly competitive industry achieves allocative efficiency in the long run.Allocative efficiency means:

Accepted Answer

Allocative efficiency means producing the optimal quantity of a good where the price of the good equals the marginal cost of producing the last unit. In a perfectly competitive market, firms are price takers and are unable to affect the market price. Therefore, they will produce where the price equals their own marginal cost, resulting in allocative efficiency.

Question 20

A perfectly competitive industry achieves allocative efficiency because

Accepted Answer

In a perfectly competitive industry, firms will produce up to the point where the marginal benefit to consumers equals the marginal cost of production. This represents allocative efficiency, meaning that resources are being allocated to their most highly valued uses, as determined by consumer demand. The other options (A, C, and D) do not fully capture the concept of allocative efficiency in a perfectly competitive market.

Quiz 7: Firms in Perfectly Competitive Markets