Chapter 9: Competitive Markets

In a perfectly competitive industry, the industry demand curve is __________.

downward sloping

In the theory of firm behavior, we assume that firms attempt to maximize _________.

total economic profits

In perfect competition, an increasing cost industry results in a(n) _________ long-run industry supply curve.

Upward sloping

What are economic profits at a firm's break-even point?

Zero

Assume that competitive firms in a competitive market are in long-run equilibrium. In the short run, what will be the effects of an increase in variable costs on the output of a typical firm in a competitive market?

A decrease in output

Think about the characteristics of firm and the products in a perfectly competitive model. Which of the markets is most likely to be considered perfectly competitive?

Agricultural commodities such as corn or wheat

Which of the following is true? Select an answer and submit. For keyboard navigation, use the up/down arrow keys to select an answer. a Competitive firms always make an economic profit b Firms sometimes continue to operate even if they are experiencing losses. c A perfectly competitive firm chooses the price of its own output. d It is difficult for a new firm to enter into a competitive market.

Firms sometimes continue to operate even if they are experiencing losses.

When should a firm keep producing in the short run?

If marginal revenue is greater than average variable cost

Assume that competitive firms in a competitive market are in long-run equilibrium. In the short run, what will be the effects of an increase in fixed costs on the output of a typical firm in a competitive market?

No change in output

In the short run, how will an increase in fixed costs affect the output of a typical firm in a competitive market?

No change in output

For a firm in a perfectly competitive market, average revenue equals ________.

the market price

In the case of an increase in fixed costs, what will happen to the economic profits of the typical competitive firm? Economic profits will ________.

decrease

Assume that competitive firms in a competitive market are in long-run equilibrium. What will happen in the LONG RUN as a result of the increase in variable costs in the previous question? Firms will ______________ because profits have ______________.

exit; decreased

Assume that competitive firms in a competitive market are in long-run equilibrium. What will happen in the long run if fixed costs increase? Firms will ______________ because economic profits have ______________.

exit; decreased

For a firm in a perfectly competitive industry, the demand curve for its own product is _________.

horizontal at the market price

Assume a constant-cost industry in a competitive market. What are the long-term effects of the following change? An increase in the demand for the good will ______________ the equilibrium price and ______________ equilibrium quantity in the goods' market.

not change; increase

A fall in demand in a perfectly competitive market that is in a long-run equilibrium will do which of the following?

Cause firms to cut back production in the short run and some to leave the industry in the long run.

Consider a decrease in fixed costs in the short run. The change will eventually result in ___________ (compared to the initial price) in the long run market price in a competitive, constant cost industry.

a decrease

A profit maximizing perfectly competitive industry will be __________ in the short run.

allocatively efficient alone

In the short run, a perfectly competitive firm that is maximizing profits will produce where:

price is equal to marginal cost

A single firm in a perfectly competitive market is a _________.

price-taker

Which of the following is true about long-run equilibrium in a competitive market? Select an answer and submit. For keyboard navigation, use the up/down arrow keys to select an answer. a All firms are earning positive economic profits. b All firms are producing a unique good. c All firms are content to stay in or out of the market. d All firms are experiencing constant marginal costs.

All firms are content to stay in or out of the market.

Accounting profits at a firm's economic profit break-even point are ________.

Positive

Fixed costs in the short run increase. The change will eventually result in ____________ (compared to the initial price) in the long run market price in a competitive, constant cost industry.

An increase

In the short run, how will a decrease in variable costs affect the output of a typical firm in a competitive market?

An increase in output

In the short run, how will an increase in demand affect the output of a typical firm in a competitive market?

An increase in output

Technical efficiency in a market means that output is produced _______.

At the lowest average cost

Given all the characteristics of perfect competition, which of the following is the main factor that affects consumers' decisions on which firm to purchase a good from?

Price

Which of the following is a characteristic of perfect competition?

Easy entry for firms

Consider the effect on costs of an increase in wages in an economy. What is the increase likely to do?

Increase short-run average costs and long-run average costs.

The clothing and attire retail market has seen an increased number of firms entering the industry. Thus, there is a lot of competition in markets for many types of clothing. What is the result of this high amount of competition?

Individual buyers and sellers cannot affect the market price.

Why can't a single firm in a perfectly competitive industry influence the market price?

Its production level is too small to affect the market

A perfectly competitive firm, that chooses to produce, will maximize profits at the output level where which of the following is true?

Marginal cost is equal to marginal revenue

In the short run, perfectly competitive firms will produce where _____________?

Price equals marginal cost

In a perfectly competitive market, a single firm that sets its price a small amount above the market price will do which of the following?

Not sell any units at all

If a perfectly competitive industry is in long-run equilibrium, then which of the following is true? a Price equals minimum average cost. b Price equals minimum marginal cost c Accounting profits for all firms are zero d Economic profits for all firms are positive

Price equals minimum average cost.

Assume a competitive industry is in long-run equilibrium. What are the short-run effects (on the typical firm) of a decrease in demand?

Prices decrease; firm output decreases

Which of the following would most likely be considered a market with free entry? a International shipping b Selling homemade crafts c Gold and silver mining d Commercial real estate

Selling homemade crafts

A perfectly competitive firm is experiencing the following short-run price and costs: P = $0.80, ATC = $2.20, AVC = $1.30, MC = $0.80. What short-run decision should this firm make?

Shut down production

Regarding perfect competition, what does it mean when the goods sold by the firms in a market are homogeneous?

The good sold by one firm is a perfect substitute of the good sold by another firm in the same market.

Consider the supply of goods in a perfectly competitive industry. Will supply in the short run be more elastic or less elastic than supply in the long run?

The long run supply will be more elastic

Why are perfectly competitive markets considered economically efficient?

The opportunity cost of society for making the good is equal to society's value of the good.

Long-run market supply

The quantity supplied at each price, after firms are given time to vary all inputs and to enter and exit the industry.

Consider the market structure of perfect competition. What does the lack of entry barriers indicate?

There are no significant obstacles preventing firms from entering and leaving the industry

In the long run, a perfectly competitive firm maximizing profit will produce where:

average cost is at a minimum.

Assume a constant-cost industry in a competitive market. What are the short-term effects of the following change? A decrease in variable costs in the short run will ______________ the equilibrium price and ______________ equilibrium quantity in the goods' market.

decrease; increase

Assume a decreasing-cost industry in a competitive market. What are the long term effects of the following change? An increase in the demand for the good will ______________ the equilibrium price and ______________ equilibrium quantity in the goods' market.

decrease; increase

Assume a constant-cost industry in a competitive market. What are the long-term effects of the following change? A decrease in variable costs in the long run will cause the equilibrium price to ______________ and the equilibrium quantity in the market to ______________.

decrease; increase by more than in the short run

In perfect competition, when will firms be able to earn economic profits?

in the short run

In the case of an increase in demand, what will happen to the economic profits of the typical competitive firm? Economic profits will ________.

increase

Assume that competitive firms in a competitive market are in long-run equilibrium. Assume a constant cost industry. In the short-run, an increase in demand will cause firm output to ______________ and the market price to ______________.

increase; increase

Assume the price of coffee increases. If the market for tea is perfectly competitive and a constant cost industry, what will happen to the tea market in the long run? Output will ______________; prices will ______________; and economic profits will ______________Indicate whether increase, decrease, cannot tell, or no change as before the price shift is correct for each blank space.

increase; not change; not change

An increase in market demand will immediately result in a perfectly competitive firm selling _____ goods at a _____ price

more; higher

Characteristics of the long run for firms

no fixed costs, all costs are variable, firms can leave or enter

Assume a constant-cost industry in a competitive market. What are the short-term effects of the following change? An increase in fixed costs will ______________ the equilibrium price and ______________ equilibrium quantity in the market.

not change; not change

In perfect competition, the demand curve for an individual's firm product is _________.

perfectly elastic

Given the following data, what should a perfectly competitive firm do? Current production = 10,000 Total cost = $300,000 Fixed cost = $200,000 Marginal cost = $15 Current price = $15

produce in the short run but close down in the long run

Assume that competitive firms in a competitive market are in long-run equilibrium. What will happen in the long run in that same constant cost industry? Prices will ______________ and the market output will ______________ when compared to the levels prior to the increase in demand.

remain the same; have increased

Consider a perfectly competitive firm. When the market price is greater than both the firm's marginal cost and average variable cost, the firm ________.

should increase its level of output

The addition of a single firm in a competitive market will cause the market ______________ to ______________.

supply; increase

In the long run, a profit-maximizing perfectly competitive industry will be:

technically and allocatively efficient.

If all firms in a perfectly competitive industry are required to adopt antipollution devices, the long-run results would be that the firms would be earning ______________ and the industry will be producing ______________ amounts of output.

zero economic profits; smaller