Econ 202 Chapter 11
True or false: Firms within pure competition are likely to earn economic profit in the long run.
False
True or false: Higher resource prices create lower ATC and cause an upward shift of the long-run ATC curve.
False
What will happen to a firm that finds a way to lower production costs through better technology or improved organization?
Its profits will increase.
The entry and the exit of firms in an industry are considered to be ___ run adjustments
long
In a purely competitive market, firms maximize profits by producing at a quantity at which price is equal to which factor?
marginal cost
The "invisible hand" in a competitive market pushes the firms in the market to
use resources and produce output that maximize consumer and produce surplus.
Profits encourage entry into purely competitive industries and losses encourage exit from purely competitive industries because
when profits are zero, the firm is earning sufficient revenue to cover its opportunity cost.
In this graph, the equilibrium price is $50 and is equal to a firm's average total cost. Therefore, the firm is earning ______ economic profits, or a(n) ______ profit.
zero; normal
(Consider This) The average life expectancy of a U.S. business is approximately
10.2 years
Which of the following does an increasing-cost industry experience?
A downward shifting average total cost (ATC) curve as the industry contracts. An upward shifting average total cost (ATC) curve as the industry expands.
At each market price for the firm's output, indicate the firm's decisions in the Short Run and Long Run: A. Price 1- The firm will: B. Price 2- The firm will: C. Price 3- The firm will:
A. Produce at a profit in both Short Run and Long Run B. Produce at a loss the Short Run, and produce at a profit in the Long Run C. Stop production in the Short Run and exit in the Long Run
Which of the following would describe the personal computer industry as a decreasing-cost industry?
As demand for computers rose, producers of the components experienced economies of scale.
Balin's Burger Barn operates in a perfectly competitive market. Balin's is currently earning economic profits of $20,000 per year. Based on this information, we can conclude that
Balin's is operating in the short run, but not the long run.
The accompanying graph shows the long-run supply and demand curves in a purely competitive market. The curves suggest that in this industry, the dollars' worth of other products that have to be sacrificed in order to produce each unit of the output of this industry is
Constant
An industry where expansion or contraction will not affect resource prices and production costs is known as a(n)
Constant-cost industry
___ profits in a competitive industry will attract new firms to enter the industry.
Econokic
When there is allocative efficiency in a purely competitive market for a product, the minimum price producers are willing to accept is
Equal to the maximum price consumers are willing to pay
Why will firms choose not to enter an industry when marginal revenue, marginal cost, price, and average total cost are equal?
Existing firms are earning only normal profits.
If there are losses in the long run, what adjustments will take place?
Firms will exit the industry until losses are eliminated.
Which of the following does a decreasing-cost industry experience?
Lower costs as industry output expands.
Allocative efficiency is achieved when the production of a good occurs where
P = MC
Which of the following will not hold true for a competitive firm in long-run equilibrium?
P=AFC
In long-run equilibrium, P= minimum ATC = MC. The equality of Pand minimum ATC means the firm is achieving
Productive efficiency
Competitive firms will always try to earn more than a normal profit by doing the following except
Raising the prices of their existing products
Which of the following best explains why the long-run supply curve of a constant-cost industry is perfectly elastic?
The entry and exit of firms changes industry output bringing the price back to its original level, where it is equal to the constant minimum ATC
Which of the following occur only in the long-run?
The expansion or contraction of plant capacity The entry and exit of firms
As firms exit the industry in the long run, market price rises and the losses for the remaining firms begin to subside. Firms will continue to exit until which of the following happens?
There are no economic losses.
True or false: Efficiency within pure competition can be temporarily disrupted by a change in consumer tastes.
True
This figure represents a constant-cost industry where the entry or exodus of firms does not affect resource prices or unit costs. Therefore, in the long run, a decrease in demand causes
a contraction of output but no change in price
(Last Word) Much of Elon Musk's innovation success can be attributed to
a systems engineering approach that finds more cost efficient ways to produce desired goods and services.
The accompanying graph represents the purely competitive market for a product. When the market is at equilibrium, the total opportunity cost of producing the equilibrium output level would be represented by the area
b.
An unfavorable shift or ___ in demand will upset the original industry equilibrium and produce ___
decrease; losses
The difference between the maximum price a consumer is willing to pay for a product and the actual price that they do pay is known as
consumer surplus
In purely competitive markets, efficiency can be temporarily disrupted and then restored by changes in:
consumer tastes. technological changes. resource supplies.
The process by which new firms and new products replace existing dominant firms and products is called
creative destruction
The transformative effects of competition are often referred to as:
creative destruction
A constant-cost industry is one in which
if 100 units can be produced for $100, then 150 can be produced for $150, 200 for $200, and so forth.
Innovations that lower production costs or create new products
often generate short-run economic profits that do not last into the long run.
___ (Allocative/Productive) efficiency means that goods are produced in the least costly way.
productive
Which of the following describes consumer surplus?
It is the difference between the maximum price that consumers are willing to pay for a product and the market price for that product.
Creative __________ captures the idea that the creation of new products and new production methods erodes the market positions of firms committed to existing products and old ways of doing business.
destruction
According to the basic model of pure competition, in the long run all firms in a purely competitive industry will earn normal profits. If all firms earn only a normal profit in the long run, why would any firms bother to develop new products or lower-cost production methods?
innovate and possibly earn an economic profit in the short run.
A decreasing-cost industry is one in which
input prices fall or technology improves as the industry expands.
The entry and exit of firms in a purely competitive industry help to improve resource allocation because
losses result in firms exiting an industry, causing resources to flow to markets where there are profits.
Which type of market produces the most efficient use of society's resources?
pure competition
Higher resource prices will result in ___ total costs
higher average
The shape of the long-run supply curve for a constant-cost industry can best be described as:
horizontal
When long-run equilibrium is reached, firms will earn a(n) ___ profit
normal
A purely competitive market leads to the efficient use of:
society's scarce resources
What must be eliminated or avoided if the "invisible hand" is to produce socially optimal outcomes in purely competitive markets?
externalities
Consider the following statement: "Ninety percent of new products fail within two years-so you shouldn't be so eager to innovate." This statement is
false because a firm could capture enough expected economic profit in the short run to cover the initial investment
There is no incentive for firms to enter or exit the industry in the long run when
firms earn a normal profit price equals minimum average total cost MR = MC
A competitive firm may realize an economic profit or loss in the ___ run but will earn only a normal profit in the ___ run
short;long
The equality of MR and MC is essential for profit maximization in all market structures because if
MR and MC are equal, any other output level will result in reduced profits.
What are the effects of the "invisible hand" in a purely competitive economy?
Maximum profits for individual producers Resource allocation that maximizes consumer satisfaction
Economic profit will fall to zero and firms will choose not to enter an industry when price is equal to which of the following factors?
Minimum average total cost Marginal cost
A constant-cost industry is one where ___ will not affect resource prices and production costs.
expansion or contraction
True or false: In pure competition, consumers benefit from productive efficiency by paying the highest price possible.
False
When discussing pure competition, the term long run refers to a period of time long enough to allow:
Firms already in an industry to either expand or contract their capacities new firms to enter or existing firms to leave
Refer to the diagrams, which pertain to a purely competitive firm producing output and the industry in which it operates. The predicted long-run adjustments in this industry might be offset by
a technological improvement in production methods.
________ efficiency means that resources are distributed among firms and industries to yield a mix of goods and services that is most wanted by society.
allocative
The equality of P and MC means the firm is achieving
allocative efficiency, since the industry is producing the amount of product that equates society's valuation of that product and the price of the product.
This figure represents a constant-cost industry where the entry or exodus of firms does not affect resource prices or unit costs. Therefore, an increase in demand causes
an expansion in industry output but no alteration in price
The upward sloping supply curve in this figure represents the long-run supply
an increasing-cost industry
If demand for the good decreases creating economic losses, firms will exit the industry in the long run. As firms exit in the long run, industry supply will ___ and market price will ___
decrease; rise
In the personal-computer industry, increasing output drives up demand for computer parts. Suppliers of these parts respond by increasing production, and economies of scale eventually drive down the prices of the parts they produce, lowering the average cost of production for computer manufacturers. This is an example of a ___ cost industry.
decreasing
The supply curve for an increasing-cost industry slopes upward because:
greater output will be supplied at higher prices
A decreasing-cost industry is one in which firms experience ___ costs as their industry ___
higher; contracts lower; expands
If the market price exceeds the firm's minimum average total cost (ATC), then it will
incur an economic profit
The diagram shows the average total cost curve for a purely competitive firm. At the long-run equilibrium level of output, this firm's total revenue
is $400.
Suppose that the pen-making industry is perfectly competitive. Also suppose that all current firms and any potential firms that might enter the industry have identical cost curves, with minimum ATC = $1.25 per pen. If the market equilibrium price of pens is currently $1.50, what would you expect the equilibrium price to be in the long run?
$1.25
New firms entering an increasing-cost industry will usually ___ (increase/decrease) resource prices.
increase
The cashew industry is perfectly competitive and until now each of the identical firms in the industry have been earning zero economic profits while selling qi units of output each (for a combined industry-wide total of Qi units) at a market equilibrium price of Piper unit. An unexpected increase in the demand for cashews raises the market equilibrium price to P2, which creates a situation in which P2 exceeds MC at q units of output. A. If the firms continued producing q units each, would their combined output of cashews be too little, too much, or just right to achieve allocative efficiency? B. In the long run, what will happen to the supply of cashews and the price of cashews?
A. Too little B. The industry's supply of cashews will exceed Q1 and the price of cashews will equal P1.
If a type of production cost for a firm cannot be changed in the short run and cannot be changed by changing the amount of output, it must be a:
Fixed cost
Assume a purely competitive decreasing-cost industry is initially in long-run equilibrium but then there is a decrease in market demand for the product. After all economic adjustments to this new situation have taken place, product price will be
Higher, but total output will be lower
Whether a purely competitive industry is a constant-cost industry or an increasing-cost industry, the final long-run equilibrium position of all competitive firms share which of the following characteristics?
In the long run, an equality occurs where price equals marginal revenue, which equals minimum average total cost. Price or marginal revenue will settle where it is equal to minimum average total cost. In the long run, a multiple equality occurs where price equals marginal cost which equals the minimum average total cost.
Which of the following is true concerning purely competitive industries?
In the short run, firms may incur economic losses or earn economic profits, but in the long run they earn normal profits.
The provided graph depicts a situation where, if the market demand for the product increases, the prices of the resources used by the firms in the
Increase
In an increasing-cost industry, which of the following occur when an increase in product demand results in economic profits and attracts new firms to the industry?
Increased resource demand drives up resource prices. Each firm's ATC curve shifts upward.
Which of the following statements are true about allocative efficiency?
It is impossible to produce net gains for society by altering the mix of goods and services produced. The goods and services produced are those that society most wants to consume. The marginal cost and marginal benefit of producing each unit of output is equal.
How does a purely competitive market restore allocative efficiency when an increase in demand disrupts efficiency?
New firms enter and increase industry output until price and marginal cost are equal.
All of the following are long-run changes, except
a firm producing more output by acquiring more raw materials for its existing factory.
Strategies attempted by firms for increasing their profits include:
developing a new product that is popular with consumers. lowering production costs through improved business organization. lowering production costs through better technology.
Suppose that as the output of mobile phones increases, the cost of touch screens and other component parts decreases. If the mobile phone industry is purely competitive, we would expect the long-run supply curve for mobile phones to be:
downward sloping
We would expect an industry to expand if firms in that industry are
earning economic profits.
Economists maintain that new firms are attracted into an industry due to:
economic profits
In the long run in a purely competitive industry,
entry and exit of firms can occur
Long-run adjustments in purely competitive markets primarily take the form of
entry or exit of firms in the market.
When efficiency is disrupted in pure competition, producers will reallocate resources until product supply is such that price will again ___ marginal cost
equal
In pure competition, productive efficiency is attained when price ___ minimum average total cost
equals
The entry of new firms entering an increasing-cost industry increase resource prices particularly:
in industries using specialized resources whose long-run supplies do not readily increase in response to increases in resource demand
Productive efficiency requires that goods be produced:
in the least costly way
In an increasing-cost industry, increases in resource prices and the minimum average total cost (ATC) are a result of
increases in product demand resulting in economic profits and industry expansion
An industry whose average total cost curve shifts upward as the industry expands and shifts downward as the industry contracts is known as a(n) ___ industry.
increasing cost
Consumers benefit from productive efficiency by paying the ___ product price possible under the prevailing technology and cost conditions, causing firms to earn only ___ profit
lowest; a normal
The long run, every purely competitive firm tends to operate at its
minimum ATC
In the long run, a purely competitive firm will only earn a ___ profit
normal
When a purely competitive firm is in long-run equilibrium,
price equals marginal cost
Economic profit for a firm will result if
price exceeds average total cost
Price can be substituted for marginal revenue in the MR = MC rule when an industry is purely competitive because
price is constant regardless of the quantity demanded.
A competitive market generates ___ efficiency and ___ efficiency
productive and allocative
Competitive market economies generate
productive efficiency and allocative efficiency
All firms in a(n) ______ industry share the same basic efficiency characteristics.
purely competitive
Suppose an increase in product demand occurs in a decreasing-cost industry. As a result,
the new long-run equilibrium price will be lower than the original long-run equilibrium price.
The accompanying graphs are for a purely competitive market in the short run. The graphs suggest that in the long run, assuming no changes in the given information, the market
the supply curve will shift to the right
After all long-run adjustments are completed in a perfectly competitive market, output will occur at each firm's minimum average
total cost where product price is equal to marginal revenue
