Chapter 11- Pure Competition in the Long Run

(Supposed to be a graph) The accompanying graph shows the long-run supply and demand curves in a purely competitive market. The curves suggest that this industry is a.) a constant-cost industry. b.) an increasing-cost industry. c.) a decreasing-cost industry. d.) not possible, because the supply curve always slopes up.

a.) a constant-cost industry.

The long-run supply curve would be perfectly elastic when a.) an increase in demand does not cause a change in product price. b.) an increase in demand causes an increase in product price. c.) a decrease in demand causes an increase in short-run supply. d.) a decrease in demand causes an increase in product price.

a.) an increase in demand does not cause a change in product price.

Which of the following outcomes is consistent with a purely competitive market in long-run equilibrium? a.) combined consumer and producer surplus will be maximized. b.) P = MC = lowest AVC. c.) the minimum willingness to pay equals the maximum acceptable price. d.) we would expect all of these to occur in the long run in a purely competitive market.

a.) combined consumer and producer surplus will be maximized.

(Consider This) The fact that the life expectancy of a U.S. business is rather short—just 10.2 years—is a reflection of the consequences of a.) competition and creative destruction. b.) producer and consumer surplus. c.) productive and allocative efficiency. d.) short-run and long-run equilibrium.

a.) competition and creative destruction.

(Supposed to be a graph) 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 a.) constant. b.) increasing. c.) decreasing. d.) not indicated in the graph.

a.) constant.

(Supposed to be a graph) The accompanying graph shows the long-run supply and demand curves in a purely competitive market. We know that when this market reaches equilibrium, the marginal a.) cost equals marginal benefit. b.) benefit exceeds marginal cost. c.) cost exceeds marginal benefit. d.) cost equals zero.

a.) cost equals marginal benefit.

The long-run supply curve under pure competition is derived by observing what happens to market price and quantity when market a.) demand changes and all consequent long-run adjustments have occurred. b.) supply changes and all consequent long-run adjustments have occurred. c.) technology changes and all consequent long-run adjustments have occurred. d.) regulation changes and all consequent long-run adjustments have occurred.

a.) demand changes and all consequent long-run adjustments have occurred.

The long-run supply curve under pure competition will be a.) downward-sloping in a decreasing-cost industry and upward-sloping in an increasing-cost industry. b.) horizontal in a constant-cost industry and downward-sloping in an increasing-cost industry. c.) vertical in a constant-cost industry and upward-sloping in a decreasing-cost industry. d.) upward-sloping in an increasing-cost industry and vertical in a constant-cost industry.

a.) downward-sloping in a decreasing-cost industry and upward-sloping in an increasing-cost industry.

Resources are efficiently allocated when production occurs at that output level where price a.) equals marginal cost. b.) equals marginal revenue. c.) is greatest over average cost. d.) is equal to average total cost.

a.) equals marginal cost.

Which of the following distinguishes the short run from the long run in pure competition? a.) firms can enter and exit the market in the long run but not in the short run. b.) firms attempt to maximize profits in the long run but not in the short run. c.) firms use the MR = MC rule to maximize profits in the short run but not in the long run. d.) the quantity of labor hired can vary in the long run but not in the short run.

a.) firms can enter and exit the market in the long run but not in the short run.

(Supposed to be a graph) The diagram shows the average total cost curve for a purely competitive firm. At the long-run equilibrium level of output, this firm's economic profit a.) is zero. b.) is $400. c.) is $200. d.) cannot be determined from the information provided.

a.) is zero.

(Last Word) The economic profits generated by Elon Musk's series of innovations are most threatened by a.) rival firms entering the market or copying Musk's innovations. b.) government regulation. c.) lack of demand for the goods and services they produce. d.) the lack of cost efficiency in producing these goods and services.

a.) rival firms entering the market or copying Musk's innovations.

Suppose an increase in product demand occurs in a decreasing-cost industry. As a result, a.) the new long-run equilibrium price will be lower than the original long-run equilibrium price. b.) equilibrium quantity will decline. c.) firms will eventually leave the industry. d.) the new long-run equilibrium price will be higher than the original price.

a.) the new long-run equilibrium price will be lower than the original long-run equilibrium price.

Creative destruction is least beneficial to a.) workers in the "destroyed" industries. b.) workers in the "created" industries. c.) consumers. d.) society as a whole.

a.) workers in the "destroyed" industries.

(Supposed to be a graph) The accompanying graph represents the purely competitive market for a product. When the market is at equilibrium, the value of the total benefits derived by consumers from this product would be represented by the area a.) a + b + c + d. b.) a + b + c. c.) a. d.) b + c.

b.) a + b + c.

(Last Word) Much of Elon Musk's innovation success can be attributed to a.) ownership of patents that prevent rivals from competing in the relevant markets. b.) a systems engineering approach that finds more cost efficient ways to produce desired goods and services. c.) exclusive government contracts. d.) making small adjustments to already popular products.

b.) a systems engineering approach that finds more cost efficient ways to produce desired goods and services.

Under pure competition, in the long run a.) neither allocative efficiency nor productive efficiency is achieved. b.) both allocative efficiency and productive efficiency are achieved. c.) productive efficiency is achieved, but allocative efficiency is not. d.) allocative efficiency is achieved, but productive efficiency is not.

b.) both allocative efficiency and productive efficiency are achieved.

Creative destruction is illustrated by which of the following pairs of products? a.) bicycles and helmets b.) digital cameras and film c.) DVD players and DVDs d.) Netflix and iPads

b.) digital cameras and film

(Supposed to be a graph) If the competitive firm depicted in this diagram produces output Q, it will a.) suffer an economic loss. b.) earn a normal profit. c.) earn an economic profit. d.) achieve productive efficiency but not allocative efficiency.

b.) earn a normal profit.

The primary force encouraging the entry of new firms into a purely competitive industry is a.) normal profits earned by firms already in the industry. b.) economic profits earned by firms already in the industry. c.) government subsidies for start-up firms. d.) a desire to provide goods for the betterment of society.

b.) economic profits earned by firms already in the industry.

Which of the following statements about a competitive firm is correct? a.) to maximize profits, a competitive firm should produce the output level at which total revenue is greatest. b.) in long-run equilibrium, a competitive firm will produce at the point of minimum average total costs. c.) a competitive firm will produce in the short run so long as total receipts are sufficient to cover total fixed costs. d.) a competitive firm will close down in the short run whenever price is less than the minimum attainable average total cost.

b.) in long-run equilibrium, a competitive firm will produce at the point of minimum average total costs.

(Supposed to be a graph) Line (1) in the diagram reflects a situation where resource prices a.) decline as industry output expands. b.) increase as industry output expands. c.) remain constant as industry output expands. d.) are unaffected by the level of output in the industry.

b.) increase as industry output expands.

(Supposed to be a graph) At output level Q1, in this diagram, a.) resources are overallocated to this product and productive efficiency is not realized. b.) resources are underallocated to this product and productive efficiency is not realized. c.) productive efficiency is achieved, but resources are underallocated to this product. d.) productive efficiency is achieved, but resources are overallocated to this product.

b.) resources are underallocated to this product and productive efficiency is not realized.

(Supposed to be a graph) The accompanying graphs are for a purely competitive market in the short run. The graphs suggest that in the long run, as automatic market adjustments occur, the demand curve facing the individual firm will a.) shift up. b.) shift down. c.) not shift. d.) slope downward.

b.) shift down.

Allocative efficiency means that a.) the product is produced at the lowest unit-cost possible. b.) society's scarce resources are used to produce products that align with consumer preferences. c.) the product is sold at a price equal to the average cost of producing it. d.) the marginal benefit of the product exceeds its marginal cost.

b.) society's scarce resources are used to produce products that align with consumer preferences.

(Supposed to have a graph) 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 a.) supply curve will shift to the left. b.) supply curve will shift to the right. c.) demand curve will shift to the left. d.) demand curve will shift to the right.

b.) supply curve will shift to the right.

Creative destruction is a.) the process by which large firms buy up small firms. b.) the process by which new firms and new products replace existing dominant firms and products. c.) a term coined many years ago by Adam Smith. d.) applicable to planned economies but not to market economies.

b.) the process by which new firms and new products replace existing dominant firms and products.

With the creation and growth of the Internet, vacationers can now book their own flights, hotels, rental cars, and other travel logistics online. If this capability resulted in creative destruction, which of the following industries would we have expected to decline the most as a result? a.) airlines b.) travel agencies c.) tourist information d.) hotels

b.) travel agencies

(Consider This) Approximately what percentage of start-up firms in the United States go bankrupt within the first two years? a.) 9.5 b.) 10.2 c.) 22 d.) 53

c.) 22

Suppose losses cause industry X to contract and, as a result, the prices of relevant inputs decline. Industry X is a.) a constant-cost industry. b.) a decreasing-cost industry. c.) an increasing-cost industry. d.) encountering X-inefficiency.

c.) an increasing-cost industry.

(Supposed to be a graph) 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 a.) b + c. b.) b. c.) c. d.) a + b + c.

c.) c.

(Supposed to be a graph) 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 cost a.) is $10. b.) is $40. c.) is $400. d.) cannot be determined from the information provided.

c.) is $400.

(Supposed to be a graph) 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 a.) is $10. b.) is $40. c.) is $400. d.) cannot be determined from the information provided.

c.) is $400.

Which would indicate that a firm is operating under conditions of pure competition and is being productively efficient? a.) it is making economic profits in the long run. b.) marginal cost equals average variable cost. c.) it produces at the minimum average total cost. d.) its marginal revenue is less than average revenue.

c.) it produces at the minimum average total cost.

Innovations that lower production costs or create new products a.) are rare in competitive industries. b.) discourage new firms from entering the industry. c.) often generate short-run economic profits that do not last into the long run. d.) usually generate long-run economic profits for the innovator.

c.) often generate short-run economic profits that do not last into the long run.

An industry is producing at the least-cost rate of production when a.) marginal cost is greater than average total cost. b.) marginal revenue is greater than price. c.) price and the minimum average total cost are equal. d.) price and marginal revenue are equal.

c.) price and the minimum average total cost are equal.

Which is true of a purely competitive firm in long-run equilibrium? a.) average fixed cost equals price. b.) marginal cost equals marginal product. c.) price equals marginal cost. d.) average variable cost equals marginal cost.

c.) price equals marginal cost.

If the price of bottled water is $2 and the marginal cost of producing it is $2.5, a.) bottled water is being produced in an increasing-cost industry. b.) society will realize a net gain if more bottled water is produced. c.) resources are being overallocated to bottled water. d.) resources are being underallocated to all other goods.

c.) resources are being overallocated to bottled water.

If the price of product Y is $25 and its marginal cost is $18, a.) Y is being produced with the least-cost combination of resources. b.) society will realize a net gain if less of Y is produced. c.) resources are being underallocated to Y. d.) resources are being overallocated to Y.

c.) resources are being underallocated to Y.

The difference between the maximum price a consumer is willing to pay for a product and the actual price the consumer pays is a.) allocative efficiency. b.) productive efficiency. c.) the consumer surplus. d.) the producer surplus.

c.) the consumer surplus.

In the context of analyzing economic efficiency, we can interpret the market demand curve to be showing a.) the average cost of producing the product at each output level. b.) the marginal revenue from each extra unit of the product. c.) the marginal benefit that consumers place on each unit of the product. d.) the average variable cost of producing the product.

c.) the marginal benefit that consumers place on each unit of the product.

The term productive efficiency refers to a.) any short-run equilibrium position of a competitive firm. b.) the production of the product mix most desired by consumers. c.) the production of a good at the lowest average total cost. d.) fulfilling the condition P = MC.

c.) the production of a good at the lowest average total cost.

In a purely competitive industry, a.) there will be no economic profits in either the short run or the long run. b.) economic profits may persist in the long run if consumer demand is strong and stable. c.) there may be economic profits in the short run but not in the long run. d.) there may be economic profits in the long run but not in the short run.

c.) there may be economic profits in the short run but not in the long run.

The "invisible hand" in a competitive market pushes the firms in the market to a.) charge a price that is equal to their marginal revenue. b.) produce an output level that allows them to earn some positive economic profits. c.) use resources and produce output that maximize consumer and producer surplus. d.) operate where their individual demand curve is above their long-run average cost curve.

c.) use resources and produce output that maximize consumer and producer surplus.

The long-run supply curve for a purely competitive industry would be horizontal when a.) an increase in product demand causes an increase in resource prices. b.) an increase in product demand causes a decrease in resource prices. c.) a decrease in product demand causes a decrease in the number of firms. d.) a decrease in product demand has no effect on resource prices.

d.) a decrease in product demand has no effect on resource prices.

After long-run adjustments, a purely competitive market achieves a.) productive efficiency but not necessarily allocative efficiency. b.) allocative efficiency but not necessarily productive efficiency. c.) either productive efficiency or allocative efficiency, but not both. d.) both productive and allocative efficiency.

d.) both productive and allocative efficiency.

When there is allocative efficiency in a purely competitive market for a product, the minimum price producers are willing to accept is a.) less than marginal benefit. b.) greater than marginal cost. c.) equal to the amount of efficiency or deadweight losses. d.) equal to the maximum price consumers are willing to pay.

d.) equal to the maximum price consumers are willing to pay.

Competitive firms will always try to earn more than a normal profit by doing the following except a.) adopting better production technology. b.) improving their business organization and operation. c.) developing new products. d.) raising the prices of their existing products.

d.) raising the prices of their existing products.

(Supposed to be a graph) Line (2) in the diagram reflects a situation where resource prices a.) decline as industry output expands. b.) increase as industry output expands. c.) rise and then decline as industry output expands. d.) remain constant as industry output expands.

d.) remain constant as industry output expands.

(Supposed to be a graph) The accompanying graph represents the purely competitive market for a product. When the market is at equilibrium, the deadweight loss would be a.) area a. b.) area b. c.) area d. d.) zero.

d.) zero.