MicroEcon-Ch. 11

A long-run adjustment will eventually cause the price level to __ , causing it to ___ before the demand shift.

Decrease; occur at a lower level than

As a result, firms will __ the industry, resulting in __ over time.

Exit; decrease in supply

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.

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

Maximum profits for individual producers Resource allocation that maximizes consumer satisfaction

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?

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

Suppose that an industry's long-run supply curve is downsloping. This suggests that

it is a decreasing-cost industry.

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.

Long-run equilibrium will be restored by ____ shifting ___ until it is equal to the minimum ATC In the long run, market (industry) price will ____

Supply, out Decrease

Which of the following distinguishes the short run from the long run in pure competition?

Firms can enter and exit the market in the long run but not in the short run.

Allocative efficiency is achieved when the production of a good occurs where

P = MC

Which of the following conditions is true for a purely competitive firm in long-run equilibrium?

P = MC = minimum ATC

Assume that a decline in consumer demand occurs in a purely competitive industry that is initially in long-run equilibrium. We can

not compare the original and the new prices without knowing what cost conditions exist in the industry.

If production is occurring where marginal cost exceeds price, the purely competitive firm will

fail to maximize profit and resources will be overallocated to the product.

The equality of MR and MC is essential for profit maximization in all market structures because if

MR and MC are equal, any other output level will result in reduced profits.

Given this change in demand, the representative firm will produce ___ output at a ___ price

More; higher

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

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

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

lower; expands higher; contracts

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

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

All of the following are long-run changes, except

A firm produces more output by acquiring more raw materials for its existing factory

___ 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

The equality of P and MC means the firm is achieving

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.

Purely competitive industry X has constant costs and its product is an inferior good. The industry is currently in long-run equilibrium. The economy now goes into a recession and average incomes decline. The result will be

an increase in output, but not in the price, of the product.

An increasing-cost industry is associated with

an upsloping long-run supply curve.

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

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

consumer tastes. technological changes. resource supplies.

The transformative effects of competition are often referred to as:

creative destruction

A constant-cost industry is one in which

if 100 units can be produced for $100, then 150 can be produced for $150, 200 for $200, and so forth.

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

long

In an increasing-cost industry, a decrease in demand will result in economic __

Losses

____ efficiency means that goods are produced in the least costly way

productive

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, an equality occurs where price equals marginal revenue, which equals minimum average total cost. Price or marginal revenue will settle where it is equal to minimum average total cost. In the long run, a multiple equality occurs where price equals marginal cost which equals the 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 goods and services produced are those that society most wants to consume. The marginal cost and marginal benefit of producing each unit of output is equal.

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

Its profits will increase.

There will be ___ firms in the industry, and the long-run industry supply curve will be __.

Less/fewer; upward sloping

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

Lower costs as industry output expands.

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

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

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? In the long run, what will happen to the supply of cashews and the price of cashews?

Too little The industry's supply of cashews will exceed Q1 and the price of cashews will equal P1

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

True

Strategies attempted by firms for increasing their profits include:

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

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

If the competitive firm depicted in this diagram produces output Q, it will

earn a normal profit

In the long run in a purely competitive industry,

entry and exit of firms can occur

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

expansion or contraction

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

externalities

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

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

Productive efficiency requires that goods be produced:

in the least costly way

If a purely competitive constant-cost industry is realizing economic profits, we can expect industry supply to

increase, output to increase, price to decrease, and profits to decrease.

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

The long run, every purely competitive firm tends to operate at its ______.

minimum ATC

Innovations that lower production costs or create new products

often generate short-run economic profits that do not last into the long run.

Price can be substituted for marginal revenue in the MR = MC rule when an industry is purely competitive because

price is constant regardless of the quantity demanded.

A firm is producing an output such that the benefit from one more unit is more than the cost of producing that additional unit. This means the firm is

producing less output than allocative efficiency requires.

In long-run equilibrium, P = minimum ATC = MC. The equality of P and minimum ATC means the firm is achieving

productive efficiency

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

purely competitive

If a purely competitive firm is producing where price exceeds marginal cost, then

the firm will fail to maximize profit and resources will be underallocated to the product.

Assume a purely competitive firm is maximizing profit at some output at which long-run average total cost is at a minimum. Then

there is no tendency for the firm's industry to expand or contract.

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

All of the following statements apply to a purely competitive market in the long run, except

total fixed costs remain constant even when output expands in the long run.

Creative destruction is least beneficial to

workers in the "destroyed" industries.