Question 1

In a perfectly competitive market, in response to a permanent increase in demand:

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Question 2

Assume that a firm's total revenue is less than its total cost for the level of output it is producing.In the short run, this firm should:

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Question 3

When economic profits are positive in a perfectly competitive industry,

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Question 4

If perfectly competitive industry B is currently realizing economic profits, we would expect that:

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Question 5

If the typical firm in a perfectly competitive market was depicted in the graph below, what would be most likely to occur?

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Question 6

Darlene runs a fruit and vegetable stand in a medium-sized community where there are many such stands.Her weekly total revenue equals $2,000.Her weekly total cost of running the stand equals $3,500, consisting of $2,500 of variable costs and $1,000 of fixed costs.An economist would likely advise Darlene to:

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Question 7

Assume a perfectly competitive firm sells its output for $150 per unit.At its current 2,000 units of output, marginal cost is $140 and increasing, and average variable cost is $143.Assuming it wants to maximize its profits, it should:

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Question 8

If price is less than average fixed costs,

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Question 9

"I'm losing money, but since my fixed costs are so high, I simply cannot afford to shut down." If the firm were attempting to maximize profit, this decision may be:

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In the short run, if the price of a product falls below the average variable cost, a firm should shut down. However, if the price is able to cover all the variable costs, it may still be able to cover a portion of the fixed costs, which would help the firm recover in the future. Therefore, if the firm is covering its variable costs and expects the price to rise in the near future, it may be reasonable to continue operating despite the current losses. This decision reflects a long-term perspective of maximizing profit rather than just minimizing losses.

Question 10

Firms will continue to enter a competitive industry until:

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Firms will continue to enter a competitive industry until any economic profits have been competed away. In the long run, firms in a perfectly competitive market will earn only normal profits, which means all economic profits have been competed away. Once all economic profits have been eliminated, firms have no incentive to enter the industry anymore.

Question 11

When perfectly competitive firms in an industry are earning positive economic profits,

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The presence of positive economic profits in a perfectly competitive market indicates that firms are earning more than their opportunity costs. This creates an incentive for other firms to enter the market and compete for those profits. As new firms enter, the market supply will increase, driving down prices and reducing the profits of all firms in the industry until they are back to zero. Therefore, we would expect entry into the industry.

Question 12

Assume a perfectly competitive firm sells its output for $150 per unit.It currently produces 6,000 units of output, at which output level it minimizes its average variable cost at $152 per unit.Assuming it wants to maximize its profits, it should:

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Since the current output level is producing at a cost greater than the revenue, the firm is making losses. The firm would minimize its losses by shutting down and producing no output. This is because the firm’s fixed costs are sunk in the short run and must be paid regardless of output levels. Hence, by shutting down, the firm can avoid variable costs and prevent further losses.

Question 13

A price-taking firm will tend to expand its output as long as price exceeds average variable cost and:

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Question 14

A profit maximizing perfectly competitive firm would never operate at an output level where

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A profit maximizing perfectly competitive firm would never operate at an output level where it would not cover all of its variable costs because if it did, it would incur losses and would not be able to continue operating in the long run. Therefore, the firm must at least cover its variable costs to break even in the short run.

Question 15

Say that Japanese firms commit not to lay off their employees when demand for their products is low, but American firms often lay off workers when demand is low.As a result, ceteris paribus, we would expect Japanese firms to:

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Japanese firms committing not to lay off employees during low demand means that they may continue to produce even when prices are low, and demand is uncertain. Therefore, they are likely to continue production at prices at which American firms may shut down production, leading to relatively greater variable costs for Japanese firms. Thus, we would expect Japanese firms to continue production at some prices at which American firms would shut down.

Question 16

When the marginal cost of a price-taking firm is less than the market price of its product, the firm should:

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When the marginal cost of a price-taking firm is less than the market price of its product, the firm can increase its profits by producing more. This is because the additional units produced will have a marginal cost that is lower than the market price, resulting in a positive contribution margin. However, the firm should only expand output if the market price is greater than or equal to the average variable cost, otherwise, it would be better off shutting down in the short run. Therefore, option A is the best choice.

Question 17

In the short run, if a firm's price is greater than its AVC but less than its ATC, the firm should:

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If a firm's price is greater than its AVC, it is covering its variable costs and if the price is less than its ATC, it is not covering its total costs. However, in the short run, a firm should continue operating even if it is generating an economic loss as long as the price is greater than AVC. This is because shutting down would mean incurring a loss equal to its fixed costs, whereas by continuing to operate, the firm is at least covering some of its fixed costs. Eventually, in the long run, the firm may need to exit the market if it continues to generate losses.

Question 18

In a perfectly competitive market, in response to a permanent decrease in demand:

Accepted Answer

In the short run, the decrease in demand will lead to an excess supply of the product, resulting in a temporary decrease in the market price. However, in the long run, firms will exit the market due to the lower demand and lower prices, leading to a decrease in supply and eventually a higher equilibrium price. Therefore, the short run equilibrium price will be lower than the eventual long run equilibrium price.

Question 19

The short-run supply curve of a perfectly competitive firm is:

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In the short run, a perfectly competitive firm will produce as long as the price of the good exceeds the marginal cost (MC) of production. Once the price falls below the average variable cost (AVC) of production, the firm will shut down and produce zero output. Therefore, the firm's short-run supply curve is equal to the marginal cost curve above the average variable cost curve. This is because as long as the price is above the AVC, the firm will continue to produce in the short run, but once the price falls below the AVC, the firm will shut down and not produce any output. Therefore, the short-run supply curve of a perfectly competitive firm is MC above AVC.

Question 20

A perfectly competitive firm cannot make economic profits in the long run because:

Accepted Answer

In a perfectly competitive market, there are no barriers to entry or exit, meaning that new firms can easily enter the market and existing firms can leave. As a result, if a firm is earning economic profits in the short run, it will attract new entrants to the market, increasing supply and driving down the market price. Eventually, the price will fall to the point where each firm in the market is earning only normal profits, and no economic profits are being earned. Therefore, a perfectly competitive firm cannot make economic profits in the long run because of the absence of barriers to entry.

Quiz 7: Firms in Competitive Markets