Micro Chapter 11

What will happen to a firm that finds a way to lower production costs through better technology or improved organization?

Its profits will increase.

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

The entry and the exit of firms in an industry are considered to be ______-run adjustments.

long

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.

A decreasing-cost industry is one in which firms experience ______ costs as their industry ______. (Check all that apply.)

lower; expands higher; contracts

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

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

A purely competitive market leads to the efficient use of:

society's scarce resources

In purely competitive markets, efficiency can be temporarily disrupted and then restored by changes in:

technological changes. resource supplies. consumer tastes.

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

True or false: Efficiency within pure competition can be temporarily disrupted by a change in consumer tastes.

true

Profits encourage entry into purely competitive industries and losses encourage exit from purely competitive industries because

when profits are zero, firms are earning sufficient revenue to cover their opportunity costs.

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

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

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, a multiple equality occurs where price equals marginal cost which equals the minimum average total cost. - Price or marginal revenue will settle where it is equal to minimum average total cost. - In the long run, an equality occurs where price equals marginal revenue, which equals minimum average total cost.

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 marginal cost and marginal benefit of producing each unit of output is equal. - The goods and services produced are those that society most wants to consume.

What are the effects of the "invisible hand" in a purely competitive economy?

- Maximum profits for individual producers - Resource allocation that maximizes consumer satisfaction

Strategies attempted by firms for increasing their profits include:

- lowering production costs through better technology. - developing a new product that is popular with consumers. - lowering production costs through improved business organization.

When discussing pure competition, the term long run refers to a period of time long enough to allow:

- new firms to enter or existing firms to leave. - firms already in an industry to either expand or contract their capacities.

Which of the following does an increasing-cost industry experience?

An upward shifting average total cost (ATC) curve as the industry expands. A downward shifting average total cost (ATC) curve as the industry contracts.

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.

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?

Each firm's ATC curve shifts upward. Increased resource demand drives up resource prices.

________ profits in a competitive industry will attract new firms into the industry.

Economic

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.

What must be eliminated or avoided if the "invisible hand" is to produce socially optimal outcomes in purely competitive markets?

Externalities

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 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.

Which of the following does a decreasing-cost industry experience?

Lower costs as industry output expands.

Which of the following conditions are true when an average, or representative, firm in a purely competitive industry is in long-run equilibrium?

MR = MC. The firm is earning a normal profit.

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

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.

Which type of market produces the most efficient use of society's resources?

Pure competition

Which of the following occur only in the long-run?

The entry and exit of firms The expansion or contraction of plant capacity

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

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.

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?

To innovate and possibly earn an economic profit in the short run.

Consider the graph below that shows a purely competitive market in a constant-cost industry. The initial equilibrium price and output level are indicated by point A. Suppose that demand for this product increases. The resulting change in demand, supply, and equilibrium is also shown in the graph below.

When all adjustments have occurred, there will be MORE firms in the industry

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 q1 units of output each (for a combined industry-wide total of Q1 units) at a market equilibrium price of P1 per 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 q1 units of output.

a. If the firms continued producing q1 units each, would their combined output of cashews be too little, too much, or just right to achieve allocative efficiency? - too little b. In the long run, what will happen to the supply of cashews and the price of cashews? - The industry's supply of cashews will exceed Q1 and the price of cashews will equal P1 c. Use a supply-and-demand diagram to show how that response will change the combined amount of consumer surplus and producer surplus in the market for cashews. - graph 1 highlight triangle [100,20,(40,60)]

a. The equality of MR and MC is essential for profit maximization in all market structures because if b. Price can be substituted for marginal revenue in the MR = MC rule when an industry is purely competitive because c. In long-run equilibrium, P = minimum ATC = MC. The equality of P and minimum ATC means the firm is achieving d. The equality of P and MC means the firm is achieving

a. MR and MC are equal, any other output level will result in reduced profits. b. price is constant regardless of the quantity demanded. c. productive efficiency d. 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.

A firm in a purely competitive industry is currently producing 1,000 units per day at a total cost of $450. If the firm produced 800 units per day, its total cost would be $300, and if it produced 500 units per day, its total cost would be $275.

a. What are the firm's ATC per unit at these three levels of production? - At 1,000 units per day, ATC = $.45 - At 800 units per day, ATC = $.38 - At 500 units per day, ATC = $.55 b. If every firm in this industry has the same cost structure, is the industry in long-run competitive equilibrium? - No c. From what you know about these firms' cost structures, what is the highest possible price per unit that could exist as the market price in long-run equilibrium? - $.38 d. If that price ends up being the market price and if the normal rate of profit is 10 percent, then what will each firm's accounting profit per unit be? - 3.8 cents per unit

A firm in a purely competitive industry has a typical cost structure. The normal rate of profit in the economy is 5 percent. This firm is earning $5.50 on every $50 invested by its founders.

a. What is its percentage rate of return? - 11 percent b. Is the firm earning an economic profit? - YES If so, how large? - 6 percent c. Will this industry see entry or exit? - ENTRY d. What will be the rate of return earned by firms in this industry once the industry reaches long-run equilibrium? - 5 percent

There are 300 purely competitive farms in the local dairy market. Of the 300 dairy farms, 298 have a cost structure that generates profits of $24 for every $300 invested.

a. What is the percentage rate of return for these 298 dairies? - 8 percent b. The other two dairies have a cost structure that generates profits of $22 for every $200 invested. What is their percentage rate of return? - 11 percent c. Assuming that the normal rate of profit in the economy is 10 percent, and that firms cannot copy each other's technology, will there be entry or exit? - Exit d. Will the change in the number of firms affect the two that earn $22 for every $200 invested? - Yes, because those two firms can claim a larger market share. e. What will be the rate of return earned by most firms in the industry in long-run equilibrium? - 10 percent f. If firms can copy each other's technology, what will be the rate of return eventually earned by all firms? - 10 percent

________ 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

Competitive market economies generate ______.

allocative efficiency productive efficiency

The upward sloping supply curve in this figure represents the long-run supply curve for:

an increasing-cost industry

An unfavorable shift or ______ in demand will upset the original industry equilibrium and produce ______.

decrease; losses

An industry where expansion or contraction will not affect resource prices and production costs is known as a(n) ______.

constant-cost industry

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

The transformative effects of competition are often referred to as:

creative destruction

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

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

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.

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

When efficiency is disrupted in pure competition, producers will reallocate resources until product supply is such that price will again _____ marginal cost.

equal

A constant-cost industry is one where ______ will not affect resource prices and production costs.

expansion or contraction

True or false: Higher resource prices create lower ATC and cause an upward shift of the long-run ATC curve.

false

True or false: In pure competition, consumers benefit from productive efficiency by paying the highest price possible.

false

The supply curve for an increasing-cost industry slopes upward because:

greater output will be supplied at higher prices

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

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

New firms entering an increasing-cost industry will usually ________ resource prices

increase

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

If the market price exceeds the firm's minimum average total cost (ATC), then it will ______.

incur an economic profit

There is no incentive for firms to enter or exit the industry in the long run when ______.

price equals minimum average total cost firms earn a normal profit MR = MC

Economic profit for a firm will result if:

price exceeds average total cost

______ efficiency means that goods are produced in the least costly way.

productive

A competitive market generates _______ efficiency and _________ efficiency.

productive; allocative

All firms in a(n) ______ industry share the same basic efficiency characteristics.

purely competitive