Chapter 8
In a decreasing−cost industry, the long-run industry supply curve is
downward sloping.
At the beginning of the twentieth century, there were many small American automobile manufacturers. At the end of the century, there were only three large ones. Suppose that this situation is not the result of lax federal enforcement of antimonopoly laws. How do you explain the decrease in the number of manufacturers? (Hint: What is the inherent cost structure of the automobile industry?)
economies of scale, where the long-run average cost of production decreases with output, allowing some firms to sell at a lower price.
[T/F] A firm should always produce at an output at which long-run average cost is minimized. Explain. This statement is
false because in the short run this may not be possible with fixed factors of production.
For a market to be perfectly competitive,
firms must be price takers, firms must produce a homogeneous product, and firms must be able to easily enter and exit the market.
If firms can easily enter and exit a market, then
firms will earn zero economic profit in the long run.
Does the seller who pays no rent have an incentive to lower the price that he charges for the vaccuum cleaner? The seller
has no incentive to lower price because he can sell all he wants at the market price.
Because industry X is characterized by perfect competition, every firm in the industry is earning zero economic profit. If the product price falls, no firm can survive. Do you agree or disagree? Discuss. This statement is
incorrect because firms will exit the industry in the long run, reducing supply until the price rises to the lowest point on the long-run average cost curve.
Assume the vitamin industry is perfectly competitive. When a new medical study shows that taking vitamins improves both the quality and length of life, demand for vitamins increases dramatically. As a result, vitamin producers' profits will
increase in the short-run but fall to zero in the long-run.
In an increasing-cost industry,
input prices increase when the industry expands and produces more output.
A good rule-of-thumb to determine whether a market is close to being perfectly competitive is for an industry to have at least 10 to 20 firms to be considered "perfectly competitive." Is this rule-of-thumb accurate? Explain. This rule-of-thumb is
not necessarily accurate because the 10 to 20 firms may collude.
If firms produce a homogeneous product, then
products will be perfectly substitutable with one another.
Why would a firm that incurs losses choose to produce rather than shut down? In a perfectly competitive industry, if a firm is incurring losses, then it might choose to produce in the short run because
revenue is greater than variable costs, resulting in smaller losses than would result from shutting down.
The government passes a law that allows a substantial subsidy for every acre of land used to grow tobacco. How does this program affect the long-run supply curve for tobacco? The long-run supply curve for tobacco will
shift down because the cost of production will be lower.
Firms would enter an industry if profit will eventually be zero because zero economic profit
signifies that a firm is earning as much as it could in its next best activity
Assuming no fixed costs are avoidable in the short run, a perfectly competitive firm's short-run supply curve is
the portion of its marginal cost curve that lies above its average variable cost curve.
If firms are price takers, then
they will produce where price equals marginal cost.
If an increase in the demand for movies also increases the salaries of actors and actresses, then the long-run supply curve for movies is likely to be
upward sloping because increases in output raise input prices.
A firm in a highly competitive market that does not maximize its profit
will most likely go out of business or be taken over by another firm.
If all sellers charge the same price and one local seller owns the building in which he does business, paying no rent, is this seller earning a positive economic profit? The seller who owns his building would earn
zero economic profit because the building would have an opportunity cost.
If all sellers charge the same price, then in the long run they will all earn
zero economic profit or else firms would enter or exit the industry.
There are 100 firms in a perfectly competitive industry. Each firm has the short-run supply curve q = P−2 for P > 2, and q = 0 for P≤2. 1. The market supply curve for this industry is 2. If the market price is $5, the firms in the industry will supply a total of _ units. 3. Total producer surplus is $_.
1. Q = 100P−200 for P>2 and Q = 0 for P≤2. 2. 300 3. 450 (300 x (5-2) x 0.5)
Which of the following is NOT a basic assumption of perfect competition? A. All firms produce identical, or nearly identical, products. B. There is free entry and exit from the market. C. Production is characterized by significant economies of scale. D. All firms and consumers are price takers.
C. Production is characterized by significant economies of scale.
A perfectly competitive constant-cost industry is initially in long-run equilibrium. When the demand for the industry's product increases, which of the following will NOT occur? A. The price of the product will increase in the short-run. B. Firms will earn positive economic profits in the short-run. C. New firms will enter the market. D. The price of the product will increase in the long-run.
D. The price of the product will increase in the long-run.
Are owners of small firms or managers of large firms more likely to seek to maximize profit?
Owners of small firms.
If all firms in a perfectly competitive market are identical, which of the following is NOT a condition for long-run equilibrium in that market?
Price is above average cost for all firms.
All firms in perfectly competitive industries earn zero economic profit in the long run because
a positive profit would induce firms to enter, decreasing price and profit, and a negative profit would induce firms to exit, increasing price and profit.
Constant returns to scale with an upward-sloping long-run industry supply curve
are possible because proportional increases in inputs yielding the same proportional increase in output may induce higher input prices.
The industry supply curve is not the long-run industry marginal cost curve because
at prices below the minimum long-run average cost of production, firms will exit the industry.
A perfectly competitive firm is currently maximizing profit. If the cost of raw materials increases, the firm should
decrease output.
The assumption of profit maximization is frequently used in microeconomics. However, do firms always seek to maximize profit? Firms
do not always maximize profit because managers may instead be more concerned with payment of dividends.
