Chapter 8 Review Questions
If a competitive firm is producing a profit-maximizing level of output and chooses to continue operating at a loss, which of the following must be true? A. MR = MC. B. p = MC. C. AC greater than or equals pgreater than or equalsAVC. D. All of the above.
D
Change the answer given in the Challenge Solution for the short run rather than for the long run. (Hint: The answer depends on where the demand curve intersects the original short-run supply curve.) The Federal Motor Carrier Safety Administration (FMCSA) along with state transportation agencies in 38 states administer interstate trucking licenses through a Single State Registration System. However, the registration process is complex, time consuming, and expensive. There are many fees and costly regulations that a trucker or firm must meet to operate. For example, for a large truck, the annual federal interstate registration fee can exceed $8,000. These largely lump-sum costslong dashwhich are not related to the number of miles drivenlong dashhave increased substantially in recent years. What effect do these new fixed costs have on the trucking market price and quantity? Are individual firms providing more or fewer trucking services? Does the number of firms in the market rise or fall? Assume truckers are in a perfectly competitive market that is initially in long-run equilibrium
In the short run, the market price will not change , the market quantity will not change , each individual trucker's output will not change , and the number of truckers will not change as a result of the various lump-sum operation fees.
Many marginal cost curves are U-shaped. As a result, it is possible that the MC curve hits the demand or price line at two output levels. Which is the profit maximizing output? Why?
Profit is maximized when MC intersects demand from below because at any quantity greater than this MC is greater than marginal revenue.Pr
Economists define a market to be competitive when the firms
are price takers
Why would high transaction costs or imperfect information tend to prevent price-taking behavior? High transaction costs and imperfect information would prevent price-taking behavior because they
discourage customers from buying from rival firms
Mercedes-Benz of San Francisco states on its Web page that the same family has owned and operated the company in the same location for over 50 years. It has also claimed in its advertising that it has lower overhead than other nearby auto dealers because it has owned this land for 50 years, and that it charges a lower price for its cars because of its lower overhead. Discuss the logic of these claims. From a short term perspective, the claim that lower overhead (from already owning the land) lowers the firm's prices is
false because land is a fixed cost in the short run.
In the long run, profits will equal zero in a competitive market because of
free entry and exit.
In the Challenge Solution, would it make a difference to the analysis whether the lump-sum costs such as registration fees are collected annually or only once when the firm starts operation? How would each of these franchise taxes affect the firm's long-run supply curve? The Federal Motor Carrier Safety Administration (FMCSA) along with state transportation agencies in 38 states administer interstate trucking licenses through a Single State Registration System. However, the registration process is complex, time consuming, and expensive. There are many fees and costly regulations that a trucker or firm must meet to operate. For example, for a large truck, the annual federal interstate registration fee can exceed $8,000. These largely lump-sum costslong dashwhich are not related to the number of miles drivenlong dashhave increased substantially in recent years. What effect do these new fixed costs have on the trucking market price and quantity? Are individual firms providing more or fewer trucking services? Does the number of firms in the market rise or fall? The Challenge Solution suggests the market price will increase and the market quantity will decrease. Further, the number of firms in the market will fall, although each firm remaining in the market will produce more. Instead of being collected annually, if the lump-sum costs are collected only once (when the firm starts operation), then
nothing changes because the fees would still be fixed costs. If the lump-sum costs are collected annually, then the firm's long-run supply curve will shift up ; if the lump sum costs are collected only once, then the long-run supply curve will shift up .
Suppose the firm faces a price of $36, an average variable cost of $20, and has an average fixed cost of $5. In the short-run, the firm
will earn an economic profit.
Should a competitive firm ever produce when it is losing money? Why or why not?
Yes, as long as revenue can cover total variable costs plus any portion of fixed costs.
