Chapter 6
Fixing up old houses requires plumbing and carpentry. Jack is a decent carpenter and a decent plumber, but is not particularly good at either. He can fix up three houses in a year if he does all of the carpentry and plumbing himself. His wage is $40,000 per year.
($40,000)/(3 houses)=$13,333
There are many identical firms with a simple cost structure: Total cost for Q = 0 is $6 and total cost for Q = 1 is $8. Each firm is incapable of producing anything more; in other words, total cost is infinite for any Q larger than 1.
In the given scenario, the fixed cost for each firm is $6 In the short run, the equilibrium price will be $2 If firms are free to enter and exit this market, the long-run price will be $8
Which of the following statements is not true?
The short-run supply curve of a firm is the portion of its marginal cost (MC) curve that lies below AVC
Graph of a perfectly elastic supply
horizontal
The long-run supply curve in a perfectly competitive market is: The long-run supply curve in a perfectly competitive market states that:
horizontal the long-run quantity can vary while the equilibrium price returns to the price at the minimum of the average total cost
Graph of perfectly elastic demand
horizontal line
If the market price increases from $1.40 to $2.70 per unit, the firm would_____production from_____to_____units.
increase 272 350
Suppose Louis Corporation could increase its profits considerably if it decided to shift from the clothing industry to the IT industry. In this case, the economic profits of Louis Corporation in the clothing industry are:
negative
Using your graph, demand for this perfectly competitive firm is
perfectly elastic (graph line is horizontal)
In terms of economic profits, early market entrants earn _____ economic profits and the last entrant earns _____ economic profits.
positive zero
The amount of money the firm brings in from the sale of its outputs is called ______, while the change in total revenue associated with producing one more unit of output is called _______
revenue marginal cost
This problem tells us that one of the sources of economies of scale is:
specialization
In the long run, the supply curve for a perfectly competitive firm is represented by:
the portion of the marginal cost curve above average total cost
Therefore, the short-run supply curve for a perfectly competitive firm is represented by:
the portion of the marginal cost curve above average variable cost
Using your graph, the slope of the industry demand curve demonstrates
the realistic assumption that the Law of Demand holds for the good under consideration
This occurs because
there are many producers all selling identical goods, meaning no one firm can impact the market price
Martha runs a business that makes designer jeans. Each of the seamstresses she employs uses one of the sewing machines on the factory floor. In the short run, the seamstresses are a ________ factor of production and the sewing machines are a _________ factor of production. The output of each seamstress is considered the ________ product
variable fixed marginal
Graph of a perfectly inelastic supply
vertical
Graph of a perfectly inelastic demand
vertical line
The more elastic a supply curve is the ______ responsive the quantity supplied is to changes in the price level
more
Given the shape of the curves, we know that curve A represents______, Curve B represents _____, and Curve C represents ______
MC, ATC, AVC
If the graph on the right represents the market supply and demand curves for pizza, what do we know about the demand curve for an individual pizza shop if the pizza market is in perfect competition?
The shop's demand curve is horizontal at exactly $8
In contrast, suppose Louis Corporation wouldn't be able to increase its profits if it decided to shift from the clothing industry to the IT industry. In this case, the economic profits of Louis Corporation in the clothing industry are:
zero
The equilibrium price is the _____
long-run average total cost of the last entrant into the market
Which of the following equations measures price elasticity of supply?
(% change in quantity supplied)/(% change in price)
Producer Surplus equation
1/2 x base x height
If the market price decreases from $1.40 to $0.80 per unit, the firm would produce_____units because at this price
200 MR2=MC
Consider the given graph: Economies of scale occur at point: ___ Diseconomies of scale occur at point: ___ In the long-run, the firm will exit the industry when it is at point:___
A C B
Assume that the market for chocolates is perfectly competitive. Which of the following statements would be true in this case?
Assume that the market for chocolates is perfectly competitive. Which of the following statements would be true in this case?
All of the following could cause an increase in producer surplus except:
an upward shift in the marginal cost curve
Perfectly elastic: Relatively elastic: Unit Elastic: Relatively inelastic: Perfectly inelastic:
E = ∞ 1 < E < ∞ E = 1 0 < E < 1 E = 0
Consider a perfectly competitive market as shown in the given graph. Suppose the initial price of a product is $1.40 per unit. At this price, the marginal revenue (MR) curve faced by a firm is:
MR1
In a perfectly competitive market, all of the following statements are true except
Marginal revenue is equal to price times quantity
Consider a perfectly competitive market and fill in the following blanks. In the long-run, there are: _____. The long-run average total cost curve (ATC) lies_____the short-run ATC. The long-run supply curve is the portion of the marginal cost (MC) curve that lies above the_____curve.
No fixed factors of production below average total cost
A perfectly competitive firm will choose to shut down when the_____intersects the marginal cost curve below the_____
Price (marginal revenue) average variable cost curve
When a product is elastic, a change in price quickly results in a change in the quantity demanded.
When a good is inelastic, there is little change in the quantity of demand even with the change of the good's price.
To construct the supply curve in a market with many firms with different cost structures, the _____
individual supply curves for each firm are added together
The more inelastic a supply curve is the _____ responsive the quantity supplied is to changes in the price level
less
Unless shutdown or exit is optimal, every firm expands production until_____
marginal revenue, marginal cost, and price are all equal (MR = MC = P)
Suppose one firm accounts for 55 percent of the global market share for a product, while 147 other firms account for the remaining 45 percent of the market. With such a large number of buyers and sellers, is this market likely to be competitive?
No, even though there are many firms in the market, there is one firm large enough to influence the market price
Larry Krovitz is a salesman who works at a used-car showroom in Sydney, Australia. It's the last week of July, but he is yet to meet his sales target for the month. A customer, Harold Kumar, who wants to buy a Ford Fiesta, walks into the showroom. After taking one of the cars for a test drive, Harold decides to buy it. While $13000 was the least that Larry would have been willing to accept for that car, he quotes a price of $19000. After some bargaining, the car is sold for $14000.
Producer Surplus: $1000 Profit: $1000
Is producer surplus always equal to profit?
Producer surplus equals profit when marginal cost and average total cost can be represented with the same curve
