Question 1

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

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Question 2

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

Accepted Answer

The U-shaped long-run average cost curve suggests that there is an optimal scale of production where the lowest average cost is achieved. This is referred to as the minimum efficient scale (MES), which is the smallest output level at which a firm can produce its product at the lowest possible long-run average cost. Therefore, from society's viewpoint, the optimal scale of production is the MES, as it allows the firm to produce efficiently and minimize costs, which can lead to lower prices and greater consumer surplus.

Question 3

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 4

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

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Question 5

The perfectly competitive market structure benefits consumers because

Accepted Answer

In a perfectly competitive market structure, firms are forced to be as efficient as possible due to competitive pressure. This leads to lower costs and prices for consumers. While firms may not necessarily produce goods at the lowest possible price in the long run, they are still incentivized to keep their costs low in order to remain competitive. Additionally, while there is no guarantee that firms in a perfectly competitive market structure will produce high quality goods, the pressure to maintain low prices may lead to higher quality goods being produced in order to differentiate themselves from competitors. Therefore, option B is the best choice as it directly addresses the benefits to consumers in a perfectly competitive market structure.

Question 6

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

Accepted Answer

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Question 7

A perfectly competitive industry achieves allocative efficiency because

Accepted Answer

Allocative efficiency occurs when the marginal benefit of consuming a good is equal to the marginal cost of producing it. In a perfectly competitive industry, firms will produce up to the point where the market price equals the marginal cost of production, leading to the efficient allocation of resources. Option A is incorrect because producing at the lowest possible cost is a characteristic of productive efficiency, not allocative efficiency. Option C is essentially the same as the explanation for option B. Option D is incorrect because carrying production surpluses does not necessarily lead to allocative efficiency.

Question 8

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"?

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Question 9

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...

Question 10

What is allocative efficiency?

Accepted Answer

Allocative efficiency refers to a situation where resources are allocated in 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 society is producing the optimal combination of goods and services that best meets the needs and wants of consumers. Choices A and B refer to productive efficiency, which is a situation in which goods are produced at the lowest possible cost. Choice D refers to distributive efficiency, which addresses how resources are distributed among members of society.

Question 11

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 take advantage of lower costs of production due to economies of scale, which reduces the average cost of production for all firms in the industry.

Question 12

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 such a way that the marginal benefit of goods and services equals their marginal cost. This means that every good or service being produced is fulfilling a consumer's demand up to the point where the cost of producing them is equal to the benefit it provides. This optimizes consumer satisfaction and benefits society as a whole.

Question 13

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

Accepted Answer

The allocatively efficient output level is where the marginal cost curve intersects the demand curve, which is at point Q1 in this diagram. At this point, the price equals the marginal cost, and the total surplus (i.e. the sum of producer and consumer surplus) is maximized. Therefore, the firm should produce Q1 units of output to achieve allocative efficiency.

Question 14

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 as it benefits from the cost-saving innovation. However, in the long run, other firms will copy the innovation, and the market supply of LCD and plasma television sets will increase, driving down the price and eliminating the firm's extra profits. Therefore, the firm's temporary increase in profits will be eliminated in the long run.

Question 15

What is productive efficiency?

Accepted Answer

Productive efficiency refers to a situation where goods can be produced at their lowest possible average cost. This means that resources are allocated efficiently and wastage is minimized, resulting in lower production costs. It does not necessarily mean that the goods produced are the most profitable or that firms are producing as much as possible, but rather that they are using their resources efficiently to produce goods at the lowest possible cost.

Question 16

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

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Question 17

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 likely pushed prices down for LCD and plasma television sets, and each firm feared losing customers to the other if they raised their prices. Therefore, cutting prices was likely the best option to maintain market share and avoid losing profits altogether.

Question 18

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 when a good or service is produced at the lowest possible cost, meaning that resources are being used in the most efficient way possible to produce the good or service. Allocative efficiency refers to resources being allocated to produce the goods and services that society values the most, which is not necessarily the same as producing at the lowest possible cost. Marginal efficiency refers to the additional benefit gained from producing one more unit of a good or service. Profit maximization is a goal of businesses, but it does not necessarily mean that the good or service is being produced at the lowest possible cost.

Question 19

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 the industry expands and output increases, the cost of production decreases due to economies of scale. As a result, firms can lower the price of their products and still earn profits. The falling price of personal computers despite increasing demand suggests that the industry is experiencing economies of scale and is a decreasing-cost industry.

Question 20

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

Accepted Answer

When firms exit a perfectly competitive industry, the number of suppliers decreases, which leads to a decrease in market supply. As a result, the market supply curve shifts to the left.

Quiz 12: Firms in Perfectly Competitive Markets