Micro chap 8
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
Suppose the long-run supply curve for a perfectly competitive industry is horizontal at a price of $12, and the minimum short-run average variable cost for each of the identical N firms in the industry is $8. If the demand curve for the industry decreases so that it intersects the short-run supply curve of the industry at $10,
in the short-run the price will decrease to $10, and the number of firms will still be N. in the long-run the price will return to $12, and the number of firms will be less than N
If a profit-maximizing firm finds that, at its current level of production, MR>MC, it will
increase output
If all conditions for a perfectly competitive market are met,
firms' demand curves are horizontal
In the long-run, profits will equal zero in a competitive market because of
free entry and exit
A small business owner earns $50,000 in revenue annually. The explicit annual cost equals $30,000. The owner could work for someone else and earn $25,000 annually. The owner's business profit is _______ and the economic profit is ________
$20,000, -$5,000
In a competitive market where the elasticity of the market demand curve is -0.5, there are 100 identical firms, and the elasticity of the supply curve to the other 99 firms is 4. What is the elasticity of the demand curve of the 100th firm?
-446
Suppose that for each firm in a 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 firms will this industry sustain in the long-run?
100
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 of an individual firm
If firms in a competitive market are not identical, then the long-run market supply curve will be
upward sloping
An increase in the cost of an input will result in
a leftward shift of the market supply curve, a leftward shift in the firm's supply curve and an upward shift of the firm's marginal cost curve
If a competitive firm is in short-run equilibrium, then
an increase in its fixed cost will have no effect on output
Economists define a market to be competitive when the firms
are price takers
Markets with hit-and-run entry and exit experience
firms entering whenever they can make a profit and exiting when they cannot make a profit
If a firm makes zero economic profit then the firm
can be earning positive business profit
Even if two products have different characteristics, such as color, the products are only considered heterogeneous if consumers
consider the two products as imperfect substitutes
Firms in long-run perfect competition produce at
constant returns to scale
In a competitive market, if buyers did not know all the prices charged by the many firms,
demand curves can be downward sloping for some or all firms
In a perfectly competitive market
firms can freely enter and exit
A special license is required to operate a taxi in many cities. The number of licenses is restricted. More drivers want licenses than are issued. This describes a non-perfectly competitive market because
firms cannot freely enter and exit the market
Long-run market supply curves are downward sloping if
input prices fall as the industry expands
If a firm makes zero economic profit, then the firm
is indifferent between staying and exiting the industry
If a firm is operating at an output level where losses are minimized, the firm
is maximizing profits
If a competitive firm's marginal profit is positive at an output of 1000 units
it should produce more than 1000 units
A firm should always shut down if its revenue is
less than its avoidable costs
If a firm operates in a perfectly competitive market, then
no firms will advertise
Which of the following markets would reach long-run equilibrium fastest?
online retail
The perfectly competitive model makes a lot of fairly unrealistic assumptions. Why do economics textbooks still talk a lot about this model?
perfectly competitive markets maximize societal welfare, many markets are close to being perfectly competitive, and it is an important model to use as a benchmark to compare other market structures to
If a firm is a price taker, then its marginal revenue will always equal
price
Suppose a competitive firm's total revenue is $1,000,000 where MR=MC, its explicit variable costs are $900,000, its fixed costs are $90,000 of which $60,000 are sunk in the short-run. If its implicit opportunity costs are $50,000, the firm should
produce even though its economic profit is negative
Assuming a horizontal long-run market supply curve, which of the following statements are TRUE about competitive firms in the long-run?
profit= 0, p=AC, and p=MC
If firms in a competitive market are not identical, then an increase in cost will
push the most inefficient firms out of the market
The demand curve that an individual competitive firm faces is known as its
residual demand curve
When the production of a good involves several inputs and inputs are used in fixed proportions, an increase in the cost of one input will usually cause total costs to
rise by the exact amount of the input price increase
When the production of a good involves several inputs, an increase in the cost of one input will usually cause total costs to
rise less than in proportion
Baseball teams shut down in the winter. This is an example of
temporarily leaving the industry because price is less than average variable cost
A market's structure is described by
the ability of firms to differentiate their product, the ease with which firms can enter and exit the market, and the number of firms in the market
In 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
A horizontal demand curve for a firm implies that
the firm is selling in a competitive market
If a firm is currently in short-run equilibrium earning a profit, what impact will a lump-sum tax have on its production decision?
the firm will not change output but earn a lower profit
The reasons why a competitive firm's short-run supply curve is upward sloping are
the law of diminishing marginal returns and profit maximization
Suppose that for each firm in a 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
Long-run market supply curves are upward sloping if
the number of firms is restricted in the long-run
The competitive firm's supply curve is equal to
the portion of its marginal cost curve that lies about AVC
How can the market demand for a product be inelastic but the demand for a particular firm is elastic?
there is a sufficiently large number of sellers
Under what circumstances will the residual supply curve for a country be upward sloping?
when it imports a large portion of the rest of the world's supply of the good
If consumers view the output of any firm in a market to be identical to the output of any other firm in the market, the demand curve for the output of any given firm
will be horizontal
Downward sloping long-run supply curves occur in markets
with learning-by-doing or with increasing returns to scale