Question 1

Everything else remaining unchanged, an increase in demand will lead to:

Accepted Answer

An increase in demand will lead to a rightward shift of the demand curve. This means that at any given price, consumers are willing to buy more of the good, leading to a higher equilibrium quantity and potentially a higher equilibrium price.

Question 2

The height of an individual demand curve at each level of output shows:

Accepted Answer

The height of an individual demand curve at each level of output shows the marginal benefit from consuming an extra unit of the good. The height represents the willingness to pay for that additional unit, which is a reflection of the marginal benefit.

Question 3

The price of fresh fish rose and the quantity sold fell. Other things remaining the same, which of the following is consistent with this observation?

Accepted Answer

An increase in the cost of fishing would lead to a decrease in the supply of fresh fish, causing the price to rise and the quantity sold to fall, assuming demand remains constant.

Question 4

If the long-run market supply curve in a perfectly competitive industry is upward sloping, then the industry:

Accepted Answer

An upward sloping long-run market supply curve indicates that as industry output increases, the cost of production for the firms also increases. This implies that the industry is an increasing-cost industry, where the cost of production for the firms rises due to factors such as an increase in the price of inputs or a decrease in the availability of resources.

Question 5

In the long run, firms in a perfectly competitive industry are most likely to:

Accepted Answer

In the long run, firms in a perfectly competitive industry will have zero economic profits and produce at minimum cost. This is because there are no barriers to entry, meaning that new firms can easily enter the market if profits are being earned. As more firms enter, the supply of the product increases, leading to a decrease in price and profits for all firms in the industry. Eventually, in the long run, firms will only earn enough revenue to cover their costs and will not earn any economic profits.

Question 6

In order to maximize profits, a perfectly competitive firm will continue producing until:

Accepted Answer

A perfectly competitive firm will continue producing as long as its marginal cost is less than or equal to the market price. If the marginal cost exceeds the market price, the firm will lose money on each additional unit produced. Therefore, the firm will produce up to the point where the marginal cost equals the market price in order to maximize profits.

Question 7

In the long run, perfectly competitive firms are in equilibrium when:

Accepted Answer

In the long run, perfectly competitive firms are in equilibrium when price is equal to the long-run marginal cost. This is because in the long run, firms can adjust their inputs and level of production to minimize their costs and achieve a level of production where price equals marginal cost. If price were to exceed long-run marginal cost, firms would increase their production to take advantage of the higher prices, leading to a decrease in price. Conversely, if price were less than the long-run average cost, firms would not be covering their costs, leading to a decrease in supply and an increase in price. Therefore, in the long run, equilibrium occurs when price equals long-run marginal cost.

Question 8

Suppose that demand for and supply of a commodity in a market are shown on a graph with price on the vertical axis and quantity on the horizontal axis. The y-intercept of the demand curve is equal to $30. The equilibrium price and quantity are $20 and 300 units respectively. What is the total consumer surplus in the market?

Accepted Answer

The answer of Suppose that demand for and supply of...

Question 9

Suppose a severe freeze damages the Florida orange crop. Everything else remaining unchanged, which of the following is most likely to be true?

Accepted Answer

When a severe freeze damages the Florida orange crop, the supply of oranges decreases. This leads to a decrease in the output of oranges as well as an increase in price due to the decrease in supply. As supply falls, the equilibrium price will rise assuming demand remains constant. Therefore, the correct choice is E.

Question 10

The goods produced by firms in a perfectly competitive market are:

Accepted Answer

In a perfectly competitive market, firms produce goods that are perfectly identical to each other. This is because any differentiation in the product would result in consumers preferring one firm's product over another, leading to a decrease in market share and profits for the less preferred firm. Therefore, firms in a perfectly competitive market strive to make their product as identical as possible to that of their competitors.

Question 11

What is meant by consumer surplus?

Accepted Answer

Consumer surplus is defined as the difference between the price that consumers are willing to pay for a good or service and the actual price they end up paying. It represents the net gain in satisfaction that consumers derive from purchasing a good, and is measured as the area above the market price and below the demand curve. Thus, option A is the correct definition of consumer surplus. Option B describes the total surplus, which includes both consumer and producer surplus. Option C describes the profit margin, not the consumer surplus. Option D describes the willingness to pay, which is not the same as consumer surplus. Option E describes the total utility, but not the consumer surplus.

Question 12

Which of the following is true of a competitive market?

Accepted Answer

Competitive markets yield efficient outcomes because producers are motivated to maximize their profits and consumers are motivated to maximize their utility. This leads to an equilibrium price and quantity where the marginal cost equals the marginal benefit, resulting in allocative efficiency. Additionally, competition drives innovation and reduces prices for consumers. However, the outcome of a competitive market may not necessarily be fair and equitable, as some individuals or groups may benefit more than others. Competitive markets do not necessarily allow consumers to gain at the expense of producers, as producers may still earn profits in a competitive market. Finally, while some producers may earn economic profits in the short run, these profits will typically attract new entrants, resulting in normal profits in the long run.

Question 13

The supply curve of a perfectly competitive firm is:

Accepted Answer

The supply curve of a perfectly competitive firm is the portion of the marginal cost curve that lies above the average variable cost curve. This is because a firm will only supply output if the price (or marginal revenue) covers the average variable costs, ensuring that it can at least cover its variable costs in the short run.

Question 14

Demand for a good is given by: Q_D = 100 - P and supply by Q_S = .5P - 20, where P is the market price of the good. In equilibrium, price and output under perfect competition will be:

Accepted Answer

In equilibrium, quantity demanded equals quantity supplied. Setting the demand equation equal to the supply equation: $100 - P = 0.5P - 20$. Solving for P gives $P = 80$. Substituting $P = 80$ into either the demand or supply equation gives a quantity of 20 units.

Question 15

In a perfectly competitive market, an individual firm faces a demand curve that:

Accepted Answer

In a perfectly competitive market, there are many buyers and sellers and firms are price takers. This means that they cannot influence the market price and must accept the prevailing equilibrium price. As a result, the demand curve faced by the firm is perfectly elastic (horizontal) at the market price. Therefore, option C is the correct answer.

Question 16

Everything else remaining unchanged, an increase in the supply of a good will lead to:

Accepted Answer

An increase in the supply of a good will lead to a surplus of the good in the market, which will lead to a fall in price to eliminate the surplus. As a result, consumers will be able to buy more of the good at a lower price, leading to an increase in consumption.

Question 17

Coal is an input in the production of oil. Suppose that over the last 3 months, the price of oil has increased and the quantity sold of oil has fallen. Other things remaining the same, which of the following is most likely to be true?

Accepted Answer

The increase in the price of oil and the decrease in the quantity sold suggest a decrease in supply. A likely cause for this could be an increase in production costs, such as coal miners receiving large wage increases, which would increase the cost of coal and thus reduce the supply of oil.

Question 18

Other factors being unchanged, the supply curve for eggs will shift downward and to the right if:

Accepted Answer

A downward and rightward shift in the supply curve for eggs indicates an increase in supply. This can happen if the cost of production decreases, such as when the price of chicken feed falls, making it cheaper to produce eggs.

Question 19

If the price of a good increases and is above the equilibrium price, then:

Accepted Answer

When the price of a good is above the equilibrium price, it means that the price is higher than where demand and supply intersect. This leads to a surplus where the quantity supplied exceeds the quantity demanded. As a result, suppliers' inventories will start to build up because they are producing more than what is being bought. To reduce this surplus, suppliers will likely reduce their output and lower prices to stimulate demand and move back towards equilibrium.

Question 20

The demand curve faced by an individual firm in a competitive market, implies that the firm:

Accepted Answer

In a competitive market, each firm is a price taker, meaning that they have no control over the market price. Therefore, the demand curve faced by an individual firm is horizontal, indicating that the firm must take the market price as given and adjust its quantity supplied accordingly. This is the essence of perfect competition.

Quiz 7: Perfect Competition