23.5 The Long-Run Industry Situation: Exit and Entry

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The minimum feasible​ long-run average cost for firms in a perfectly competitive industry is ​$25 per unit. If every firm in the industry currently is producing an output consistent with a​ long-run equilibrium, calculate the marginal cost incurred by each firm and the market price. Marginal cost is ​$___ and market price is ​$___.

$25 $25

n the long​ run, all firms in a perfectly competitive industry A. sell differentiated products to earn economic profits. B. earn positive economic profits. C. break even. D. suffer economic losses.

C. break even.

In​ long-run equilibrium, the perfectly competitive firm makes A. positive economic profits. B. positive accounting profits but negative economic profits. C. zero economic profits. D. negative economic profits.

C. zero economic profits.

At the​ long-run equilibrium the​ firm's average total cost is A. maximized. B. zero. C. equal to average fixed cost. D. minimized.

D. minimized.

The role of profits in the model of perfect competition is to A. make it worthwhile for people to invest in the company. B. determine which firm is the best firm in the industry. C. set the optimal price. D. signal entrepreneurs to enter the industry.

D. signal entrepreneurs to enter the industry.

Along the​ long-run industry supply​ curve, firms in the industry earn zero accounting profits. A. False B. True In a​ decreasing-cost industry, the​ long-run supply curve is A. downward sloping. B. vertical. C. horizontal. D. upward sloping.

A. False A. downward sloping.

At​ long-run equilibrium for a perfectly competitive​ firm, price equals marginal revenue equals marginal cost equals average cost. A. True B. False

A. True

A perfectly elastic​ long-run supply curve A. indicates that input prices do not change when firms enter or exit the industry. B. indicates that​ short-run profits are zero. C. is not possible when the​ firm's demand curve is also perfectly elastic. D. is derived from the horizontal summation of the​ firms' long-run supply curves.

A. indicates that input prices do not change when firms enter or exit the industry.

In​ long-run equilibrium which of the following is true for the firms in a perfectly competitive​ industry? A. P​ = MR​ > MC​ = ATC. B. P​ = MR​ = MC​ > ATC. C. P​ = MR​ = MC​ = ATC. D. P​ > MR​ > MC​ = ATC.

C. P​ = MR​ = MC​ = ATC

In the long​ run, perfectly competitive firms make _____ economic profits because of entry and exit whenever there are industrywide economic profits or losses. A​ constant-cost industry has a _____ ​long-run supply curve. An​ increasing-cost industry has _____ ​-sloping ​long-run supply curve. A​ decreasing-cost industry has _____ -sloping ​long-run supply curve. In the long​ run, a perfectly competitive firm produces to the point at which​ price, marginal​ revenue, marginal​ cost, short-run minimum average​ cost, and​ long-run minimum average cost are all _____. Perfectly competitive pricing is essentially _____ pricing.​ Therefore, the perfectly competitive solution is called efficient because _____ represents the social opportunity cost of producing one more unit of the good.

zero horizontal an upward a downward equal marginal cost marginal cost

In several perfectly competitive markets for minerals extracted from the​ earth, steady increases in demand for the required minerals eventually have generated​ long-run increases in the market prices of these minerals. Which of the following statements best describes the types of adjustments that must have occurred in these markets to have brought about this​ outcome? A. An increase in demand raises price and profitability of the existing firms. Since firms cannot enter or exit the​ market, supply stays unchanged and price increases in the long run. B. An increase in demand initially leads to an increase in price and profits of the firms. New firms enter the market and the equilibrium quantity increases with an increase in market price along an upward rising​ long-run industry supply curve. C. An increase in demand raises price. But buyers purchase less since price increases. This reduces profitability of the firms. Some firms exit the market leading to a reduction in quantity and a further increase in price. D. An increase in demand raises the price and profits of the existing firms. New firms enter the market and as cost of production stays​ unchanged, a new competitive equilibrium is reached with a higher price. Such mineral industries can best be described as A. ​increasing-cost industries. B. ​decreasing-cost industries. C. ​constant-cost industries. D. ​high-cost industries.

B. An increase in demand initially leads to an increase in price and profits of the firms. New firms enter the market and the equilibrium quantity increases with an increase in market price along an upward rising​ long-run industry supply curve. D. ​increasing-cost industries.

In the long​ run, capital will flow into industries in which profitability is highest and will flow out of industries in which profitability is lowest. A. False B. True In the long​ run, a perfectly competitive industry has a tendency to move toward​ equilibrium, a point where A. all firms exit the market. B. economic profits are zero. C. accounting profits are zero. D. economic profits are maximized.

B. True B. economic profits are zero

If too many or too few resources are used in the production of a​ good, this is referred to as market failure. A. False B. True When a competitive firm sells its product at a price equal to marginal​ cost, A. market failure will occur. B. it is possible to make one person better off without making someone else worse off. C. the marginal benefit to consumers is maximized. D. society enjoys an efficient allocation of productive resources.

B. True D. society enjoys an efficient allocation of productive resources.

A perfectly competitive industry is initially in a​ short-run equilibrium in which all firms are earning zero economic profits but in which firms are operating below their minimum efficient scale. All of the following statements are true as the industry and the firms make their​ long-run adjustments except that A. firms begin to make adjustments along their​ long-run average cost curves. B. some firms leave the industry and the existing firms slowly adjust their production to reach their minimum efficient scale. C. individual firms expand their output level to their minimum efficient scale. D. new firms enter the​ market, causing the industry output to expand.

B. some firms leave the industry and the existing firms slowly adjust their production to reach their minimum efficient scale.

In​ long-run equilibrium in perfect​ competition, A. firms will be making positive economic profits. B. the firm produces at the minimum point of its​ long-run and​ short-run average total cost curves. C. price is greater than marginal​ revenue, which equals marginal cost. D. the market demand curve is perfectly elastic.

B. the firm produces at the minimum point of its​ long-run and​ short-run average total cost curves

In several markets for digital devices that can be viewed as perfectly​ competitive, persistent increases in demand eventually have generated​ long-run reductions in the market prices of these devices. Which of the following explanations best describes the types of adjustments that must have occurred in these markets to have brought about this​ outcome? A. Demand increases but as price​ falls, firms exit the market and a new​ long-run competitive equilibrium is reached. B. An increase in demand raises the price. But buyers purchase less since the price increases. This reduces profitability of the firms. Some firms exit the market and eventually price falls. C. An increase in demand initially leads to an increase in price and profits of the firms. New firms enter the market and the equilibrium quantity increases with a reduction in market price along a downward sloping​ long-run industry supply curve. D. Demand increases but supply increases more to reduce the equlibrium price. Firms cannot enter or exit the market. Such digital device industries can be characterized as A. ​low-cost industries. B. ​constant-cost industries. C. ​decreasing-cost industries. D. ​increasing-cost industries.

C. An increase in demand initially leads to an increase in price and profits of the firms. New firms enter the market and the equilibrium quantity increases with a reduction in market price along a downward sloping​ long-run industry supply curve C. ​decreasing-cost industries.

The perfectly competitive firm in​ long-run equilibrium produces a level of output such that A. AFC​ + AVC​ = ATC. B. P exceeds ATC by the greatest amount. C. P​ = MC​ = MR​ = short-run ATC​ = long-run ATC. D. there is entry of new firms into the industry.

C. P​ = MC​ = MR​ = short-run ATC​ = long-run ATC.

Two years​ ago, a large number of firms entered a market in which existing firms had been earning positive economic profits. By the end of last​ year, the typical firm in this industry had begun earning negative economic profits. No other events occurred in this market during the past two years. I.) During the last​ year, A. the firms could not increase output since some key inputs were in short supply. B. the firms produced less output due to increased competition and consequently incurred losses. C. the firms incurred​ losses, as the market output expanded and the market price fell. D. the firms became less efficient and started to produce at a level higher than minimum efficient scale. II.) All of the following adjustments will take place in this market beginning this year except A. that price and cost will fall. B. that market output will fall and price will increase. C. that some firms will leave the market. D. that existing firms will move toward their minimum efficient scale and zero economic profit

I.) C. the firms incurred​ losses, as the market output expanded and the market price fell. II.)A. that price and cost will fall.


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