Microeconomics, Chapter 11

The green shaded area in this figure represents:

Consumer surplus

Firms will not enter an industry when marginal revenue, marginal cost, price and average total cost are equal because:

Economic profit is zero and existing firms are earning only normal profits

If there are losses in the long run, what adjustments will take place?

Firms will exit the industry until losses are eliminated.

Even if resource prices and technology are the same for all firms, which are the first to leave the industry when demand declines?

Firms with less productive labor forces or higher transportation costs. Less skillfully managed firms that tend to incur higher costs.

Which of the following conditions may or will cause firms to exit an industry? Check all that apply.

If price is less than minimum average total cost, resulting losses will cause firms to leave the industry (While a firm may continue to operate under these circumstances, it may also choose to shut down.) If price is less than minimum average variable cost, resulting losses will cause firms to leave the industry.

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

If market price initially exceeds minimum average total costs, the resulting economic profit will attract new firms to the industry which will eventually result in _____.

Industry expansion that increases supply until price equals minimum average total cost (ATC)

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.

In a perfectly competitive market, after all long-run adjustments are completed

Output will occur at each firms minimum average total cost where product price is equal to marginal revenue

Th orange shaded area in this figure represents:

Producer surplus

In pure competition, society's resources are allocated efficiently when:

Profit-motivated firms produce output to the point where price or marginal revenue (MR) and marginal cost (MC) are equal.

Changes in resource supplies

The existing Price-MC equality may be disrupted by either raising or lowering MC. The resulting inequality will cause producers, in either pursuing profits or avoiding losses to reallocate resources until supply is such that price once again equals MC.

Changes in consumer Tastes

The existing Price-MC equality may be disrupted by either raising or lowering MC. The resulting inequality will cause producers, in either pursuing profits or avoiding losses, to reallocate resources until supply is such that price once again equals MC.

Technological changes

The existing Price-MC equality may be disrupted by either raising or lowering MC. The resulting inequality will cause producers, in either pursuing profits or avoiding losses, to reallocate resources until supply is such that price once again equals MC.

____ efficiency means that resources are distributed among firms and industries to yield a mix of goods and services that most wanted by society.

allocative

Competitive market economies strive to generate:

allocative efficiency productive efficiency

Allocative efficiency is achieved when it is impossible to obtain any net gains for society by simply

altering the combination of goods and services that are produced from society's limited supply of resources.

A specific number of firms, all with fixed unalterable plants, mainly describes:

an industry's short run

If demand for the good decreases creating economic losses, firms will exit the industry in the long run. As firms exit the long run, industry supply will ____ and market price will ____.

decrease; rise

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

economic

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

equal

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

firms earn a normal profit price equals minATC MR=MC

Productive efficiency requires that____.

goods be produced in the least costly way.

If price is initially less than minimum average total cost, resulting losses will cause firms to leave the industry eventually resulting in ____.

industry contraction that decreases supply until price rises again to equal minimum average total cost (ATC) (An industry contracts when firms incur losses and leave the industry. The loss of firms or suppliers causes supply to decrease resulting in increases in price until once again that price is equal to the minimum ATC.

If a firm's price exceeds the firm's minimum average total cost (ATC), then:

it will incur an economic profit

In the _____ (long/short) run, competitive firms have sufficient time either to increase or to decrease their capacities.

long (In the long run, competitive firms can adjust their plant size, machinery, equipment and other capital resources in response to changes in demand. In the short run, firms can respond to changes in demand only by using the fixed plant size more intensely by adjusting variable inputs such as labor and raw materials.)

The entry and exit of firms in an industry are considered ____ ____ adjustments.

long run

Consumers benefit from productive efficiency by paying the ____ product price possibly under the prevailing technology and cost conditions, causing firms to earn only ____ profits.

lowest; normal

Competition, reflected in the entry and exit of firms, eliminates economic profits and losses by adjusting the product ____ to equal the minimum long-run average ____ cost.

price; total (Recall that competitive firms are price takers and price can only change as a result of changes in supply or demand.) (The sum of average fixed and variable costs.)

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 ( The profits or losses earned in the short run by purely competitive firms will motivate firms to enter or exit the market. This easy entry and exit tends to increase or decrease supply causing price to fall or rise toward the lowest ATC of producing thus guaranteeing only normal profits in the long run.

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 consumer taste resource supplies

In this graph, the equilibrium price is $50 and it is equal to the firm's average total cost. Therefore, this firm is earning ____ economic profits or a(n) ____ profit.

zero; normal