ECON Chapter 8
If the shut down rule, p < AVC, is the same in the short run and the long run, explain why the shutdown prices may be different.
In the short run there are fixed costs, but in the long run all costs are variable. In the long run the average variable cost is usually higher than in the short run.
Suppose there are 1000 identical wheat farmers. For each, TC = 10 + q2. Market demand is Q = 600,000 - 100p. Derive the short-run equilibrium Q, q, and p. Does the typical firm earn a short-run profit?
The firmʹs supply is q = 0.5p; market supply is Q = 500p. Market equilibrium can be found as 500p = 600,000 - 100p, or 600p = 600,000, so p = 1,000 and Q = 500,000. q = 0.5p = 500. Profit = (500 ∗ 1,000) - (10 + 250,000) = 249,990. Each firm earns a profit.
Assume government policy increases the demand for corn.
The producer surplus of corn growers will increase.
Mary purchased a stuffed animal toy for $5. After a few weeks, someone offered her $100 for the toy. Mary refused. One can conclude that Maryʹs consumer surplus from the toy is
at least $95
in deciding whether to operate in the short run, the firm must be concerned with the relationship between price of the output and
average variable cost
in a perfectly competitive market
buyers are price-takers
Currently, when a consumer purchases a ʺgreenʺ automobile, the U.S. government gives the consumer a rebate. When the rebate program expires, we would expect
consumer surplus to drop.
in the short run
firms may choose to operate at a loss
The difference between producer surplus and profit is always the associated
fixed costs
In the long run, profits will equal zero in a competitive market because of
free entry and exit.
Which is an important aspect of the perfectly competitive market that leads to long run equilibrium?
freedom of entry and exit
firms that exhibit price-taking behavior
have outputs that are too small to influence market price and thus take it as given
If firms in a competitive market are identical, then the long-run market supply curve will be
horizontal.
Mister Jones was selling his house. The asking price was $220,000, and Jones decided he would take no less than $200,000. After some negotiation, Mister Smith purchased the house for $205,000. Smithʹs consumer surplus is
not able to be calculated from the information given
Price floors and price ceilings
not enough information to determine
if a competitive firm finds that it maximizes short-run profits by shutting down, which of the following must be true?
p< AVC for all levels of output
the model of perfect competition is valuable for
prediction or comparison to other markets
if a firm is a price taker, then its marginal revenue will always equal
price
If firms in a competitive market are not identical, then an increase in cost will
push the most inefficient firms out of the market.
Government intervention in a perfectly competitive market
reduces economic well-being.
if market price is greater than or equal to the minimum of AVC but below the minimum of AC, then
revenue covers variable costs and some of the fixed costs, although profit is negative
if market price is greater than the minimum of AVC but below the minimum of AC, then
revenue covers variable costs and some of the fixed costs, although profit is negative
If a market produces a level of output below the competitive equilibrium, then
social welfare is not maximized.
If in a market the last unit of output was sold at a price higher than marginal cost
social welfare is not maximized.
The deadweight loss associated with output less than the competitive level can be determined by
summing the change in the total consumer and producer surplus from moving from the competitive level of output to less output.
which of the following are not characterisitics of a competitive market?
there are only one or two sellers
if a firm happened to be the only seller of a particular product, it might behave as a price taker as long as
there is free entry and exit
a profit maximizing firm selects output such that
total profit is maximized
If firms in a competitive market are not identical, then the long-run market supply curve will be
upward sloping
if consumers view the output of any firm in a market to be identical to the output of any others in the market, the demand curve for the output of any given firm
will be horizontal
Economists define a market to be competitive when the firms
are price takers
the competitive firm's supply curve is equal to
the portion of its marginal cost curve that lies above AVC
Suppose the market supply curve is p = 5Q. At a price of 10, producer surplus equals
10
Suppose the market supply curve is p = 5 + Q. At a price of 10, producer surplus equals
12.50
Suppose that for each firm in the competitive market for potatoes, long-run average cost is minimized at $0.20 per pound when 500 pounds are grown. The demand for potatoes is Q =10,000/p. If the long-run supply curve is horizontal, then how many pounds of potatoes will be consumed in total?
50,000
Giving presents of Christmas does NOT generate a deadweight loss if
A) all gift are money., B) everybody gets exactly want she wants., C) nobody can be made better off by returning the gift and purchasing a different one.
Total surplus
A) is maximized under perfect competition., B) represents the gains from trade to market participants., C) treats consumer and producer surplus equally.
Assuming a horizontal long-run market supply curve, which of the following statements is (are) TRUE about competitive firms in the long run?
A) p = MC, B) p = AC, C) profit = 0
In a short run competitive equilibrium
A) the market demand curve is horizontal. B) the market demand curve is downward sloping. C) the market demand curve is perfectly inelastic.
In a perfectly competitive market with 75 non-identical firms producing at market price p1
A) the supply curve is flatter than if there were only 35 identical firms. B) the supply curve is more elastic than if there were only 25 identical firms. C) the supply curve is more inelastic than if the firms were identical.
In a perfectly competitive market with 100 identical firms producing at market price p 1
A) the supply curve is flatter than if there were only 50 identical firms. B) the supply curve is more elastic than if there were only 50 identical firms. C) the firms have identical marginal costs.
Producer surplus equals
A) total revenue minus total variable cost., B) total revenue minus the sum of all marginal cost., C) profit plus fixed cost.
which of the following products would be sold in a competitive market?
Brent crude oil
True/ False: The long-run supply curve in a competitive market is upward-sloping
False
True/False: A competitive firmʹs supply curve is identical to its marginal cost curve.
False
True/False: As the quantity produced of a good increases, the social welfare generated by that good increases
False
True/False: If a firm cannot earn profits in the short run, it will shut down.
False
Suppose there are 1000 identical wheat farmers. For each, TC = 10 + q2. Derive the market supply curve.
For each MC = 2q and AVC = q. Thus MC > AVC for all levels of output. The firm sets p = 2q or q = 0.5p. Since there are 1000 firms each producing q, market supply equals Q = 500p.
there are currently N identical firms in a market. If it is a perfectly competitive market, the short-run market supply curve at any given price is
N times the supply curve at any given price is
When is the profit a firm earns equal to the producer surplus? Explain.
Profit equals producer surplus when the firm has no fixed costs. Producer surplus can be thought of as the gains from trade. In the short run, if the firm produces any output, it earns profit equal to revenue minus variable costs minus fixed costs. If the firm shuts down, it loses the fixed costs. The producer surplus equals the profit from trading minus the profit or loss from not trading, revenue minus variable costs. If no fixed costs exist, then profit will equal the producer surplus.
What is one reason activists might lobby the government to force firms to produce more output than they normally would in a perfectly competitive market?
They value consumer surplus more than producer surplus.
What is one reason activists might lobby the government for regulation limiting the production of a product to less than would normally be in a perfectly competitive market?
They value producer surplus more than consumer surplus.
an increase in the cost of an input will result in
a leftward shift in the firm's supply curve, an upward shift of the firm's marginal cost curve and a leftward shift of the market supply curve
the short run is
a period of time in which at least one input cannot be varied
With identical firms, constant input prices, and all the other characteristics of a competitive market
a shift in demand has no effect on the long-run average cost, resulting in change in equilibrium quantity but not price.
in a competitive market, if buyers didnt know all the prices charged by the many firms
demand curves can be downward sloping for some or all firms
the short run is
dependent on the characteristics of the industry
In the long run, firms in a competitive market
earn zero economic profit.
Assume a consumer has a horizontal demand curve for a product. His consumer surplus from buying the product
equals zero
in all conditions for a perfectly competitive market
firms can freely enter and exit
if all conditions for a perfectly competitive market are met
firms demand curves are horizontal
A ʺstair-likeʺ market supply curve is the result of
firms having different costs
Long-run market supply curves are downward sloping if
input prices fall as the industry expands
Producer surplus
is a measure of what a firm gains from trade.
A consumerʹs marginal willingness to pay
is equal to the marginal value to the consumer of the last unit of output.
Market consumer surplus
is the area under the demand curve and above market price, up to the quantity actually bought.
Consumer surplus
is the difference between what a consumer would willingly pay for a good and the price actually paid.
A firm will enter a competitive market when
it can earn a positive long-run profit.
if a competitive firm cannot earn profit at any level of output during a given short-run period, then which of the following is LEAST likely to occur?
it will minimize its loss by decreasing output so that price exceeds marginal cost
a firm should always shut down if its revenue is
less than its avoidable costs
the perfectly competitive model makes a lot of fairly unrealistic assumptions. why do economic textbooks still talk a lot about this model?
many markets are close to being perfectly competitive, it is an important model to use as a benchmark to compare other markets structures to, and perfectly competitive markets maximize societal welfare
If a market produces a level of output that exceeds the competitive equilibrium output, then
marginal cost will exceed price
which of the following statements about profit maximizing firms in competitive market is FALSE?
marginal revenue does not have to equal marginal cost
Consumers seek to
maximize expected consumer surplus
If a market is not perfectly competitive, then government intervention
may increase economic well-being
Deadweight loss occurs when
surplus losses to one group due to intervention are not offset by surplus gains to another.
if a firm operates in a perfectly competitive market, then it will most likely
take the price of its product as determined by the market
if the absence of any government regulation on price, if a firm has no power to set price on its own, one can safely conclude
the demand curve for the firm's product is horizontal
Producer surplus is equal to
the difference between price and marginal cost for all units sold
a horizontal demand curve for a firm implies that
the firm is selling in a competitive market
if the market price is above a firm's average cost at the quantity produced
the firm operates and makes a profit
if market price is greater than or equal to the minimum of AVC but below the minimum of AC, then
the firm will operate because its loss is less than if it shut down
if a specific tax is implemented
the firms average cost curve shifts up, resulting in lower profits, the after-tax marginal cost curve shifts, resulting in lower quantity produced, and there is less profit per unit sold
With identical firms, constant input prices, and all the other characteristics of a competitive Market
the long run equilibrium price is the minimum of the average cost curve
Like the short run
the long run supply curve is the sum of the individual firmsʹ supply curves
Suppose that for each firm in the competitive market for potatoes, long-run average cost is minimized at $0.20 per pound when 500 pounds are grown. If the long -run supply curve is horizontal, then
the long-run price will be $0.20 per pound
A firm will exit a competitive market when
the long-run profit would be negative
If firms in a competitive market have different cost functions, then
the market supply curve reflects those firmsʹ operating envelopes, even in the short run.
Deadweight loss occurs when
the maximum level of total welfare is not achieved
A market's structure is described by
the number of firms in the market, the ease with which firms can enter and exit the market, and the ability of firms to differentiate their product
Long-run market supply curves are upward sloping if
the number of firms is restricted in the long run.
