Question 1

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, the cost of production decreases allowing firms to keep reducing prices while remaining profitable. The fact that the price of personal computers has fallen despite increases in demand strongly suggests that this is a decreasing-cost industry.

Question 2

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, the entry of new firms increases the availability of resources and technology, which leads to lower average costs for existing and new firms. This is because as the industry grows, economies of scale can be achieved, leading to more efficient production processes and lower costs per unit of output.

Question 3

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 the two firms likely pushed prices down, and each feared losing customers if it raised prices. This suggests that the firms were not in a strong enough position to raise prices and increase profits.

Question 4

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 indicates that there are both economies of scale and diseconomies of scale. The minimum efficient scale is the level of output at which the economies of scale have been fully realized, but before the onset of diseconomies of scale. At this level of output, the firm can produce at the lowest possible cost per unit, and from society's viewpoint, this is the optimal scale of production because resources are used efficiently and productively. Therefore, choice A is the best choice.

Question 5

The perfectly competitive market structure benefits consumers because

Accepted Answer

In a perfectly competitive market, firms are forced to be as efficient as possible in order to keep up with the competition. This leads to lower prices for consumers as firms strive to lower their costs and increase their output. While firms may not produce goods at the lowest possible price in the long run, they are still under pressure to keep prices competitive in the short run, which benefits consumers. Firms in perfectly competitive markets also tend to add a smaller markup over average cost compared to firms in other market structures, which can also lead to lower prices for consumers. However, there is no guarantee that firms in a perfectly competitive market will produce high-quality goods at low prices, as quality and price are determined by a variety of factors beyond market structure.

Question 6

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, meaning that resources are being utilized in the most efficient way. This results in the lowest cost of production and allows firms to offer lower prices to consumers. Allocative efficiency, on the other hand, refers to the situation where resources are allocated to produce the goods and services that society values the most, which may not necessarily result in the lowest cost of production. Marginal efficiency and profit maximization are not directly related to the concept of producing goods and services at the lowest possible cost.

Question 7

A perfectly competitive industry achieves allocative efficiency because

Accepted Answer

Allocative efficiency is achieved when resources are allocated in a way that maximizes the total welfare of society. 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 the point where allocative efficiency is achieved. Choices A and C may be true for a perfectly competitive industry but they do not specifically address the concept of allocative efficiency. Choice D is incorrect as firms in a perfectly competitive industry do not carry production surpluses as they operate at the minimum efficient scale.

Question 8

What is productive efficiency?

Accepted Answer

Productive efficiency is achieved when goods are produced at the lowest possible average cost. This means that resources are being used in the most efficient way possible and there is no waste. It is also the point where the price of the good reflects the minimum average cost of production. This is important for firms as they can maximize profits by producing goods at the lowest possible cost.

Question 9

What is allocative efficiency?

Accepted Answer

Allocative efficiency refers to a situation where resources are allocated in a way that the last unit produced provides marginal benefit to consumers equal to the marginal cost of producing it. This ensures that resources are allocated to the most valued use, resulting in the greatest overall welfare for society. Option A refers to productive efficiency, while option B refers to cost efficiency. Option D refers to equity, not efficiency.

Question 10

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 firms in the industry decreases and the market supply curve shifts to the left. This is because there is now less supply available in the market, leading to an increase in the equilibrium price.

Question 11

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 producer will be able to increase its profits as it now has a cost advantage over its competitors. However, as other firms copy the innovation, the cost advantage will erode, leading to lower profits in the long run. This is because the industry is perfectly competitive, so any cost advantage will be competed away over time. Additionally, obtaining a patent for the innovation may provide temporary protection, but once the patent expires, other firms can also use the innovation, leading to increased competition and lower profits in the long run.

Question 12

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

Accepted Answer

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

Question 13

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 14

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 earn...

Question 15

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 16

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

This situation is known as allocative efficiency, where resources are allocated in a way that produces the combination of goods and services most wanted by society. This ensures that production is at the socially optimal level, where marginal benefit equals marginal cost. Productive efficiency (A) means producing goods and services at the lowest possible cost. Marginal efficiency (C) is not a commonly used term in economics. Profit maximization (D) is a goal of firms, but it does not necessarily result in allocative efficiency.

Question 17

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 18

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 occurs where the market price intersects with the marginal cost curve. In this case, that occurs at a quantity of Q₁. At this output level, the marginal benefit to society (the market price) is equal to the marginal cost to the firm, resulting in allocative efficiency.

Question 19

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 20

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...

Quiz 12: Firms in Perfectly Competitive Markets