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

Which of the following equations measures price elasticity of​ supply?

(% change in quantity supplied)/(% change in price)

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

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

The more elastic a supply curve is the ______ responsive the quantity supplied is to changes in the price level

more

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?

Perfectly elastic: Relatively elastic: Unit Elastic: Relatively inelastic: Perfectly inelastic:

E = ∞ 1 < E < ∞ E = 1 0 < E < 1 E = 0

Given the shape of the​ curves, we know that curve A represents______, Curve B represents _____, and Curve C represents ______

MC, ATC, AVC

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

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

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

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

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

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.

All of the following could cause an increase in producer surplus​ except:

an upward shift in the marginal cost curve

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​)