MBA 650 - Ch 9 Market Structure and Long-Run Equilibrium
When firms are in long-run equilibrium,
economic profit is zero (including the opportunity cost of capital)
Suppose that a new entry has decreased your demand elasticity from -2 to -3 (made demand more elastic) and that your price, before the new entry, was $20. You should adjust your price to _____ due to the new entry and decreased demand elasticity.
$15 MC=$20×(1−1/2) = $20×0.5=10 P = 10 / 1 - (1/3)
National Mfg. Co. (NMC) is a monopoly in the market. Suppose it can sell 4 units of its output at $5.00 per unit and 5 units of its output at $4.90 per unit. NMC will produce and sell the fifth unit if its marginal cost is
$4.50 or less
Perfectly competitive industry (Perfect Competition)
- firms produce a product or service with very close substitutes, meaning demand is very elastic; - firms have many rivals and no cost advantages; - the industry has no entry or exit barriers.
Distributors of cigarettes earn some monopoly profits in their local markets but see them slowly erode as substitutes enter the market. Suppose Nebraska has scheduled a vote on the legalization of marijuana. Additionally, suppose that marijuana and cigarettes are substitutes and that the legalization of marijuana would lead to a decrease in the price of marijuana. Given the relationship between marijuana and cigarettes, the legalization of marijuana would lead to ________ in demand for cigarettes. Thus, distributors of cigarettes would likely ______ the legalization of marijuana.
A Decrease ; Oppose
True
A competitive firm can earn positive or negative economic profit in the short run but only until entry or exit occurs. In the long run, competitive firms earn only an average rate of return.
Suppose workers prefer a certain amount of autonomy and flexibility in their job responsibilities. Job A and B are identical in all respects except Job A offers some autonomy and flexibility. Which of the following combinations of annual salaries would you predict?
A: $40,000 B: $50,000
AgCo will sell no bushels of corn.
AgCo sells corn in a perfectly competitive market. Say the current market price for a bushel of corn is $4.00. If AgCo prices at $4.10 per bushel for its corn,
You have recently been hired to advise the owners of Kenfield Insect Ltd. (KIL), which operates in a perfectly competitive industry. KIL is currently producing at a point where market price equals its marginal cost; KIL's total revenue is less than its total cost but exceeds its total variable cost. What advice should you provide KIL's owners?
Continue production in the short run to minimize losses, but exit the industry in the long run
At a university faculty meeting, a proposal was made to increase health care benefits for new faculty to keep pace with the high cost of health care. True or False: In the long run, this increase in health care benefits will make faculty positions more attractive than other jobs. (Hint: Consider how the indifference principle applies to this occupation in the long run.)
False
True or False: The adjustment to long-run equilibrium occurs more quickly for monopolists than for competitive industries.
False
Which of the following characteristics is most consistent with a perfectly competitive market?
Firms are able to enter and exit the market freely.
True
If an asset is mobile, then in long-run equilibrium, the asset will be indifferent about where it is used; that is, it will make the same profit no matter where it goes.
Swimming pool construction provides a compensating wage differential of $10.
Imagine you are considering two potential summer jobs to makes some extra spending money - the first is working for a landscaping company and the second involves working for a swimming pool installation company. You are indifferent between the two jobs even though the swimming pool job pays $10 more hour. This must mean that
True
In equilibrium, differences in the rate of return reflect differences in the riskiness of an investment.
True
In the long run, even monopoly profit is driven to zero.
Which of the following types of firm is most likely to be a monopoly?
Local electricity provider
Merrimack Industries sells its output in a perfectly competitive market. Which of the following statements is true about Merrimack?
Merrimack will earn zero economic profits in long-run equilibrium
Which of the following statements is true regarding the difference between monopoly prices and quantities compared to perfectly competitive prices and quantities?
Monopoly prices are higher than prices in perfect competition but quantities are lower than in perfect competition.
Flat (perfectly elastic)
The demand curve for the output of a perfectly competitive firm is
The main reason that a monopoly can earn positive economic profits in the long run while a perfectly competitive firm cannot is
There are barriers to entry in a monopoly market.
Describe the difference in economic profit between a competitive firm and a monopolist in both the short and long run. Which should take longer to reach the long-run equilibrium? In the short run, both monopolists and competitive firms _____ earn positive economic profits. In the long run, ________ can earn a positive economic profit.
can ; neither monopolists nor competitive firms
Relative to managers in more ______ industries, managers in more _____ industries are more likely to spend their time on pricing strategies rather than on reducing costs.
competitive ; monopolistic
Charlton Computer Company has a monopoly over the production of a specialized processor. It will be profitable for Charlton to increase production of its specialized processors as long as marginal cost
is less than marginal revenue.
Pat is the owner of United Local Supply, which makes zero economic profit. Pat is
making a return equal to his or her opportunity cost.
38% per year.
profit moves back toward an average rate of return at a speed of about
If firms in a competitive industry begin to earn profit in the short run, new firms will enter. This will shift the industry
supply curve to the right, meaning market price will fall.
