Question 1

If there are constant returns to scale in a competitive industry,then the long-run industry supply curve for that industry is horizontal.

Accepted Answer

If there are constant returns to scale in a competitive industry, firms can increase their production without increasing their average costs. This means that as the market demand for the product increases, firms can easily enter the industry and produce more without facing higher costs. Therefore, the long-run supply curve will be horizontal at the minimum average total cost of production.

Question 2

If some firm in an industry has the production function F(x,y)= x^3/4 y^3/4,where x and y are the only two inputs in producing the good,then that industry cannot be competitive in the long run.

Accepted Answer

The production function has constant returns to scale (CRS) only if the sum of the exponents of x and y is equal to 1 (i.e. F(tx, ty) = tF(x,y) for any positive scalar t). In this case, the sum of the exponents is 5/4+5/4=5/2 which is not equal to 1. Therefore, the industry has decreasing returns to scale (DRS) and cannot be competitive in the long run.

Question 3

The bicycle industry is made up of 100 firms with the long-run cost curve c(y)= 2+ (y₂/2)and 120 firms with the long-run cost curve c(y)= y₂/4.No new firms can enter the industry.What is the long-run industry supply curve at prices greater than $2?

Accepted Answer

D

Question 4

The market for a good is in equilibrium when the government unexpectedly imposes a quantity tax of $2 per unit.In the short run,the price will rise by $2 per unit so that firms can regain their lost revenue and continue to produce.

Accepted Answer

When a government imposes a quantity tax, the burden of the tax is typically shared between consumers and producers, depending on the elasticity of demand and supply. The price paid by consumers usually increases by less than the tax amount, and the price received by producers decreases. The market adjusts to a new equilibrium where the quantity supplied and demanded is lower than before the tax.

Question 5

The bicycle industry is made up of 100 firms with the long-run cost curve c(y)= 2 + (y₂/2)and 60 firms with the long-run cost curve c(y)=y₂/10.No new firms can enter the industry.What is the long-run industry supply curve at prices greater than $2?

Accepted Answer

The answer of The bicycle industry is made up of...

Question 6

The short-run industry supply curve can be found by horizontally summing the short-run supply curves of all the individual firms in the industry.

Accepted Answer

This is because the short-run supply curve of an individual firm is simply its marginal cost curve above its average variable cost. Therefore, the industry supply curve can be found by adding up the quantity supplied at each price level by all the individual firms in the industry.

Question 7

An industry has 1,000 firms,each with the production function f(x₁,x₂)=x^1/2₁x^1/2₂.The price of factor 1 is $1 and the price of factor 2 is $1.In the long run,both factors are variable,but in the short run,each firm is stuck with using 100 units of factor 2.The long-run industry supply curve is

Accepted Answer

The answer of An industry has 1,000 firms,each with the...

Question 8

In East Icicle,Minnesota,on the northern edge of the corn belt,the growing season is short and the soil is poor.Corn yields are meager unless a great deal of expensive fertilizer is used.In Corncrib,Illinois,the land is fertile and flat and the growing season is 20 days longer.For any given expenditure per acre,corn yields are far greater than in East Icicle.Farmers in both places are profit maximizers who grow corn.

Accepted Answer

The answer of In East Icicle,Minnesota,on the northern edge of...

Question 9

It is possible to have an industry in which all firms make zero economic profits in long-run equilibrium.

Accepted Answer

In perfectly competitive markets, firms cannot earn economic profits in the long-run due to the presence of easy entry and exit of firms in the industry. This means that any profits earned in the short-run will attract new entrants, driving down prices and ultimately reducing profits to zero in the long-run equilibrium.

Question 10

A competitive industry has 10,000 identical firms.For each firm in the industry,the long-run cost of producing y units of output is c(y)= $100 +y2 if y$\gt$0 and c(0)= 0.The government imposes a lump sum tax of $300 on each firm in the industry.Firms can avoid this tax only by going out of business.There is free entry and exit into this industry.In the long run,the number of firms

Accepted Answer

In a competitive industry with free entry and exit, firms will enter or exit the market until economic profits are zero. A lump sum tax does not affect the marginal cost of production, so it does not change the price at which firms are willing to supply their product. Instead, it reduces profits. Firms will enter or exit until profits are zero again, which may change the number of firms but not necessarily in the ways described by options A, B, C, or D. None of these options accurately describe the effect of a lump sum tax in a competitive market with free entry and exit.

Question 11

In a competitive market,if both demand and supply curves are linear,then a per-unit tax of $10 will generate exactly the same deadweight loss as a per-unit subsidy of $10.

Accepted Answer

Both a tax and a subsidy introduce distortions in the market that result in deadweight loss. In a perfectly competitive market with linear demand and supply curves, the amount of deadweight loss generated by a tax or a subsidy is equal to the size of the tax or subsidy multiplied by 0.5 (area of the triangle between the new equilibrium quantity and the original supply/demand curve). Therefore, a per-unit tax of $10 and a per-unit subsidy of $10 will generate the same amount of deadweight loss.

Question 12

The possibility of more firms entering an industry in the long run tends to make long-run industry supply more price elastic than short-run industry supply.

Accepted Answer

In the long run, firms have more flexibility to enter or exit an industry, which means that the supply can adjust more quickly in response to changes in price. This makes long-run industry supply more price elastic than short-run industry supply.

Question 13

Suppose that all firms in a given industry have the same supply curve given by S_i(p)= 2p when p is greater than or equal to $2 and S_i(p)=0 0 when p is less than $2.Suppose that market demand is given by D(p)= 12 -p.If firms continue to enter the industry so long as they can do so profitably,the equilibrium price must be closest to

Accepted Answer

To find the equilibrium price, we need to find the intersection of the industry supply curve and the market demand curve. First, we need to find where the industry supply curve switches from S_i(p)F1F1F1S1F1F1F10 2p to S_i(p)F1F1F1S1F1F1F10 0. This occurs when: S_i(p)F1F1F1S1F1F1F10 2p = S_i(p)F1F1F1S1F1F1F10 0 2p = 2 p = $2 Therefore, the supply curve is: S_i(p)F1F1F1S1F1F1F10 2p for p ≥ 2 S_i(p)F1F1F1S1F1F1F10 0 for p < 2 Now we can set the industry supply equal to the market demand and solve for the equilibrium price: S_i(p)F1F1F1S1F1F1F10 2p = D(p)F1F1F1S1F1F1F10 12 F1F1F1S1F1F1F10 p 2p = 12 - p 3p = 12 p = $4 Therefore, the equilibrium price is closest to choice C) $2.40, since this is the price on the industry supply curve for which the quantity demanded equals 12. Note that choices A) $5 and B) $4 are too high, since prices above $2 will result in zero industry supply according to the supply curve. Choice D) $2 is too low, since this price will result in excess demand. Choice E) $1.75 is even lower and therefore even farther from the correct answer.

Question 14

On a tropical island there are 100 potential boat builders,numbered 1 through 100.Each can build up to20 boats a year,but anyone who goes into the boatbuilding business has to pay a fixed cost of $19.Marginal costs differ from person to person.Where y denotes the number of boats built per year,boat builder 1 has a total cost function c(y)= 19 + y.Boat builder 2 has a total cost function c(y)=19 + 2y,and more generally,for each i,from 1 to 100,boat builder i has a cost function c(y)= 19 + iy.If the price of boats is 25,how many boats will be built per year?

Accepted Answer

The cost function for each boat builder is c(y) = 19 + iy, where i is the boat builder's number and y is the number of boats built. To determine how many boats will be built, we need to find out for which boat builders the revenue (price per boat times the number of boats built) exceeds or equals their total cost. The price of boats is given as 25, so the revenue for building y boats is 25y. A boat builder will choose to build boats if 25y ≥ 19 + iy. Simplifying, we get 25y - iy ≥ 19, or y(25 - i) ≥ 19. Since each builder can build up to 20 boats, we need to find the highest boat builder number (i) for which building boats is profitable. Solving for i when y = 20 (the maximum number of boats a builder can make), we get 20(25 - i) ≥ 19, or 500 - 20i ≥ 19, simplifying to 481 ≥ 20i, and finally i ≤ 24.05. This means that boat builders numbered 1 through 24 will find it profitable to build boats, each producing up to 20 boats. Therefore, the total number of boats built per year is 24 builders * 20 boats/builder = 480 boats.

Question 15

On a tropical island there are 100 potential boat builders,numbered 1 through 100.Each can build up to8 boats a year,but anyone who goes into the boatbuilding business has to pay a fixed cost of $7.Marginal costs differ from person to person.Where y denotes the number of boats built per year,boat builder 1 has a total cost function c(y)= 7 + y.Boat builder 2 has a total cost function c(y)= 7 + 2y,and more generally,for each i,from 1 to 100,boat builder i has a cost function c(y)= 7+ iy.If the price of boats is 15,how many boats will be built per year?

Accepted Answer

The answer of On a tropical island there are 100...

Question 16

The bicycle industry y is made up of 100 firms with the long-run cost curve c(y)= 2 + (y₂/2)and 60 firms with the long-run cost curve c(y)=y₂/10.No new firms can enter the industry.What is the long-run industry supply curve at prices greater than $2?

Accepted Answer

The answer of The bicycle industry y is made up...

Question 17

Two firms constitute the entire doghouse industry.One has a long-run cost curve of 3 + 4y₂/3 and the other has a long-run cost curve of 10 + y₂/10.If no new firms enter the industry,at which of the following prices will exactly one firm operate?

Accepted Answer

For only one firm to operate in the industry, the price must be at least equal to the minimum of the two firms' average total cost curves.

The minimum of the first firm's average total cost curve is found by taking the derivative with respect to y, setting it equal to zero, and solving for y:

(3F1S1 + F1B1y)/(4yS1U1B0/3) = 0

3F1S1 + F1B1y = 0

y = -3F1S1/F1B1

Substituting this value of y back into the first firm's average total cost curve gives:

ATC1 = (3F1S1 - 3F1S1)/(4(-3F1S1/F1B1)S1U1B0/3)

ATC1 = (2/3)F1B1

The minimum of the second firm's average total cost curve is found similarly:

ATC2 = (10F1S1 + 10F1B1y)/(10yS1U1B0)

Taking the derivative with respect to y, setting it equal to zero, and solving for y:

(10F1B1)/(10yS1U1B0)^2 = 0

y = 0

Substituting y = 0 back into the second firm's average total cost curve gives:

ATC2 = 10F1S1/10S1U1B0 = F1S1/S1U1B0

Therefore, if no new firms enter the industry, the minimum of the two average total cost curves is (2/3)F1B1, and this occurs at a price of $3 (since both firms' curves are increasing in price). The first firm will not operate at this price because its average total cost is higher than the price, but the second firm will operate at this price because its average total cost is lower than the price.

Question 18

In the absence of government interference,there is a constant marginal cost of $6 per ounce for growing marijuana and delivering it to buyers.Suppose that government authorities seize shipments whenever they find them and resell the marijuana that they seize on the open market.The probability that any shipment of marijuana is seized is .10.If a shipment is seized,there is no other punishment besides loss of the marijuana that is seized.The effect of the government action is to

Accepted Answer

The answer of In the absence of government interference,there is...

Question 19

On a tropical island there are 100 potential boat builders,numbered 1 through 100.Each can build up to 16 boats a year,but anyone who goes into the boatbuilding business has to pay a fixed cost of $15.Marginal costs differ from person to person.Where y denotes the number of boats built per year,boat builder 1 has a total cost function c(y)=15 + y.Boat builder 2 has a total cost function c(y)= 15 + 2y,and more generally,for each i,from 1 to 100,boat builder i has a cost function c(y)=15 + iy.If the price of boats is 40,how many boats will be built per year?

Accepted Answer

The answer of On a tropical island there are 100...

Question 20

On a small island,papayas can only be sold in the market in the center of the island.Although papayas only cost $1 to raise,they can be sold in the market for $3.But it costs $.10 per kilometer to transport each papaya to market.If an acre of land grows 200 papayas,how much rent does an acre of land 4 kilometers from the market command?

Accepted Answer

The answer of On a small island,papayas can only be...

Quiz 24: Industry Supply-Part A

If there are constant returns to scale in a competitive industry,then the long-run industry supply curve for that industry is horizontal.

If some firm in an industry has the production function F(x,y)= x^3/4 y^3/4,where x and y are the only two inputs in producing the good,then that industry cannot be competitive in the long run.

The bicycle industry is made up of 100 firms with the long-run cost curve c(y) = 2+ (y₂/2) and 120 firms with the long-run cost curve c(y) = y₂/4.No new firms can enter the industry.What is the long-run industry supply curve at prices greater than $2?

The market for a good is in equilibrium when the government unexpectedly imposes a quantity tax of $2 per unit.In the short run,the price will rise by $2 per unit so that firms can regain their lost revenue and continue to produce.

The bicycle industry is made up of 100 firms with the long-run cost curve c(y) = 2 + (y₂/2) and 60 firms with the long-run cost curve c(y) =y₂/10.No new firms can enter the industry.What is the long-run industry supply curve at prices greater than $2?

The short-run industry supply curve can be found by horizontally summing the short-run supply curves of all the individual firms in the industry.

It is possible to have an industry in which all firms make zero economic profits in long-run equilibrium.

In a competitive market,if both demand and supply curves are linear,then a per-unit tax of $10 will generate exactly the same deadweight loss as a per-unit subsidy of $10.

The possibility of more firms entering an industry in the long run tends to make long-run industry supply more price elastic than short-run industry supply.

The bicycle industry y is made up of 100 firms with the long-run cost curve c(y) = 2 + (y₂/2) and 60 firms with the long-run cost curve c(y) =y₂/10.No new firms can enter the industry.What is the long-run industry supply curve at prices greater than $2?

Two firms constitute the entire doghouse industry.One has a long-run cost curve of 3 + 4y₂/3 and the other has a long-run cost curve of 10 + y₂/10.If no new firms enter the industry,at which of the following prices will exactly one firm operate?

Quiz 24: Industry Supply-Part A

If there are constant returns to scale in a competitive industry,then the long-run industry supply curve for that industry is horizontal.

If some firm in an industry has the production function F(x,y)= x3/4 y3/4,where x and y are the only two inputs in producing the good,then that industry cannot be competitive in the long run.

The bicycle industry is made up of 100 firms with the long-run cost curve c(y) = 2+ (y2/2) and 120 firms with the long-run cost curve c(y) = y2/4.No new firms can enter the industry.What is the long-run industry supply curve at prices greater than $2?

The market for a good is in equilibrium when the government unexpectedly imposes a quantity tax of $2 per unit.In the short run,the price will rise by $2 per unit so that firms can regain their lost revenue and continue to produce.

The bicycle industry is made up of 100 firms with the long-run cost curve c(y) = 2 + (y2/2) and 60 firms with the long-run cost curve c(y) =y2/10.No new firms can enter the industry.What is the long-run industry supply curve at prices greater than $2?

The short-run industry supply curve can be found by horizontally summing the short-run supply curves of all the individual firms in the industry.

An industry has 1,000 firms,each with the production function f(x1,x2) =x1/21x1/22.The price of factor 1 is $1 and the price of factor 2 is $1.In the long run,both factors are variable,but in the short run,each firm is stuck with using 100 units of factor 2.The long-run industry supply curve is

It is possible to have an industry in which all firms make zero economic profits in long-run equilibrium.

In a competitive market,if both demand and supply curves are linear,then a per-unit tax of $10 will generate exactly the same deadweight loss as a per-unit subsidy of $10.

The possibility of more firms entering an industry in the long run tends to make long-run industry supply more price elastic than short-run industry supply.

The bicycle industry y is made up of 100 firms with the long-run cost curve c(y) = 2 + (y2/2) and 60 firms with the long-run cost curve c(y) =y2/10.No new firms can enter the industry.What is the long-run industry supply curve at prices greater than $2?

Two firms constitute the entire doghouse industry.One has a long-run cost curve of 3 + 4y2/3 and the other has a long-run cost curve of 10 + y2/10.If no new firms enter the industry,at which of the following prices will exactly one firm operate?

If some firm in an industry has the production function F(x,y)= x^3/4 y^3/4,where x and y are the only two inputs in producing the good,then that industry cannot be competitive in the long run.

The bicycle industry is made up of 100 firms with the long-run cost curve c(y) = 2+ (y₂/2) and 120 firms with the long-run cost curve c(y) = y₂/4.No new firms can enter the industry.What is the long-run industry supply curve at prices greater than $2?

The bicycle industry is made up of 100 firms with the long-run cost curve c(y) = 2 + (y₂/2) and 60 firms with the long-run cost curve c(y) =y₂/10.No new firms can enter the industry.What is the long-run industry supply curve at prices greater than $2?

The bicycle industry y is made up of 100 firms with the long-run cost curve c(y) = 2 + (y₂/2) and 60 firms with the long-run cost curve c(y) =y₂/10.No new firms can enter the industry.What is the long-run industry supply curve at prices greater than $2?

Two firms constitute the entire doghouse industry.One has a long-run cost curve of 3 + 4y₂/3 and the other has a long-run cost curve of 10 + y₂/10.If no new firms enter the industry,at which of the following prices will exactly one firm operate?