ECON 182 Microeconomics - Chapter 10 & 11 -Chapter Readings

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

Blank 1: Economic

Higher resource prices will result in ______ total costs.

higher average

Pure ___ involves a very large number of firms.

competition

Economic profit for a firm will result if:

price exceeds average total costs.

Which of the following does an increasing-cost industry experience?

-A downward shifting average total cost (ATC) curve as the industry contracts. -An upward shifting average total cost (ATC) curve as the industry expands.

What are two ways that a purely competitive firm can determine the level of output at which it will realize maximum profit or minimum losses?

-By comparing marginal revenue to marginal costs -By comparing total revenue to total costs

Which of the following features occur in a purely competitive market?

-Many independently acting sellers -Sales in both national and international markets.

Which of the following occur only in the long-run?

-The expansion or contraction of plant capacity -The entry and exit of firms

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

-firms earn a normal profit - price equals minimum average total cost -MR=MC

A decreasing-cost industry is one in which firms experience ______ costs as their industry ______. (Check all that apply.)

-higher; contracts -lower; expands

______________ (Allocative/Productive) efficiency means that goods are produced in the least costly way.

Blank 1: Productive

_________ competition is considered to be rare in the real world.

Blank 1: Pure or Perfect

creative ______________ captures the idea that the creation of new products and new production methods erodes the market positions of firms committed to existing products and old ways of doing business.

Blank 1: destruction

Each purely competitive firm's demand curve is perfectly ___________ at the equilibrium price.

Blank 1: elastic, flat, or horizontal

Economists group industries into ____ distinct market structures

Blank 1: four or 4

New firms entering an increasing-cost industry will usually __________ (increase/decrease) resource prices

Blank 1: increase or raise

A competitive market generates ______________ efficiency and ___________ efficiency. (Enter one word for each blank.)

Blank 1: productive Blank 2: allocative

A competitive firm may realize an economic profit or loss in the _________ run but will earn only a normal profit in the ________ run

Blank 1: short Blank 2: long or longer

Why will firms choose not to enter an industry when marginal revenue, marginal cost, price, and average total cost are equal?

Existing firms are earning only normal profits.

What must be eliminated or avoided if the "invisible hand" is to produce socially optimal outcomes in purely competitive markets?

Externalities

True or false: Firms within pure competition are likely to earn economic profit in the long run.

False

True or false: Higher resource prices create lower ATC and cause an upward shift of the long-run ATC curve.

False

True or false: In pure competition, consumers benefit from productive efficiency by paying the highest price possible.

False

True or false: Because of the law of diminishing returns, marginal costs eventually fall as more units of output are produced.

False Reason: marginal costs eventually rise as more units of output are produced

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

Firms will exit the industry until losses are eliminated.

In a purely competitive market, firms maximize profits by producing at a quantity at which price is equal to which factor?

Marginal cost

Economic profit will fall to zero and firms will choose not to enter an industry when price is equal to which of the following factors?

Marginal cost Minimum average total cost

Which of the following does a decreasing-cost industry experience?

Lower costs as industry output expands

Between P2 and P4, the firm will minimize its losses by producing and supplying the quantity at which:

MR=P=MC

Based on the information in this chart, at which price will a firm shut down?

P1 Reason: Recall that a firm shuts down as soon as price is below minimum average variable cost.

At any price above ______, the firm will obtain economic profit by producing to the point where MR=P=MC.

P4

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?

1) In the long run, a multiple equality occurs where price equals marginal cost which equals the minimum average total cost 2) Price or marginal revenue will settle where it is equal to minimum average total cost. 3)In the long run, an equality occurs where price equals marginal revenue, which equals minimum average total cost.

Given an output of Q4, at which price will the firm break even or earn a normal profit?

P4 reason: Recall that a firm breaks even at the point where marginal revenue is equal to marginal cost, and that marginal revenue is equal to price for the purely competitive firm.

Based on the graph, what happens at a price of $131 and 7 units of output?

Per-unit profit is maximized but total profit is not.

Which of the following is a method of calculating economic profit in pure competition?

Price minus average total cost multiplied by quantity

Which type of market produces the most efficient use of society's resources?

Pure competition

What are the effects of the "invisible hand" in a purely competitive economy?

Resource allocation that maximizes consumer satisfaction Maximum profits for individual producers

True or false: Firms within pure competition will produce standardized products

True Reason: Firms within pure competition produce standardized products.

Firms that operate in a purely competitive industry:

do not differentiate their products

The shaded box in this graph represents the firm's _______,

economic profit calculated as (P-ATC)Q

Economists maintain that new firms are attracted into an industry due to:

economic profits

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

equal

In pure competition, productive efficiency is attained when price _____ minimum average total cost.

equals

A constant-cost industry is one where ______ will not affect resource prices and production costs.

expansion or contraction

Whenever price is ______ average variable costs but is ______ average total costs, the firm can pay part, but not all, its fixed costs by producing.

greater than; less than

An industry whose average total cost curve shifts upward as the industry expands and shifts downward as the industry contracts is known as a(n) ______ industry.

increasing-cost

If the market price exceeds the firm's minimum average total cost (ATC), then it will ______.

incur an economic profit

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)

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)

In this graph, a firm incurs a loss but continues to operate because price is ______ than the lowest average total cost but above the lowest average ______ cost.

less; variable

After all long-run adjustments are completed in a perfectly competitive market, output will occur at each firm's minimum average ______.

total cost where product price is equal to marginal revenue

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

zero; normal

Competitive market economies generate ______.

- allocative efficiency -productive efficiency

In purely competitive markets, efficiency can be temporarily disrupted and then restored by changes in:

- consumer tastes -technological changes -resources supplies

Strategies attempted by firms for increasing their profits include:

- developing a new product that is popular with consumers. -lowering production costs through better technology. -lowering production costs through improved business organization.

Assume that there are 100 identical firms in an industry that produces a product with a market price of $10. Each firm has an average total cost of $2 and an equilibrium output of 10 units. What is the industry's economic profit?

$8,000 Reason: An industry's economic profit can be determined by subtracting average total cost from price and multiplying by output, then multiplying the total by the number of firms in the industry. Reason: This is the economic profit of the individual firm. To determine the industry's economic profit, multiply by the number of firms in the industry.

Which of the following statements are true about allocative efficiency?

- The marginal cost and marginal benefit of producing each unit of output is equal. - The goods and services produced are those that society most wants to consume. -It is impossible to produce net gains for society by altering the mix of goods and services produced

In this table, at a price of $81.00, the loss-minimizing level of output is _____.

6 units Reason: The firm can minimize its losses by producing at the point in which average variable cost is lowest. Reason: At seven units, marginal cost exceeds price and thus production should not occur. Reason: The firm can minimize its losses by producing at the point in which average variable cost is lowest.

In this table, at a price of $131, the profit-maximizing level of output is _____ units of output.

9

Which of the following market structures produces only a standardized product?

A purely competitive market Reason: In a monopolistically competitive market, differentiated products are produced. Reason: A pure monopoly tends to produce a unique product Reason: An oligopoly may produce differentiated and standardized products.

Which of the following would describe the personal computer industry as a decreasing-cost industry?

As demand for computers rose, producers of the components experienced economies of scale.

Which of the following best explains why the price-marginal cost relationship improves as production increases?

At the very early stages of production, marginal product is low, making marginal cost unusually high.

Which of the following reasons explains why the purely competitive firm's demand curve is perfectly elastic?

Because the individual firm is a price taker, the marginal revenue curve coincides with the firm's equilibrium price.

Which of the following best summarizes why firms in purely competitive industries do not differentiate their products?

Because there are so many of them selling a standardized product Reason: A standardized product limits the ability to differentiate. Consider foreign exchange, stocks, bonds, and agricultural products.

______________ efficiency means that resources are distributed among firms and industries to yield a mix of goods and services that is most wanted by society. (Enter one word in the blank.)

Blank 1: Allocative

In an increasing-cost industry, which of the following occur when an increase in product demand results in economic profits and attracts new firms to the industry?

Increased resource demand drives up resource prices. Each firm's ATC curve shifts upward.

What is the firm's most likely response if price is exactly equal to minimum average variable cost?

Indifference to producing or shutting down

Which of the following best describes oligopoly?

Involves only a few sellers of a standardized or differentiated product, so each firm is affected by the decisions of its rivals.

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.

What will happen to a firm that finds a way to lower production costs through better technology or improved organization?

Its profits will increase.

How does a purely competitive market restore allocative efficiency when an increase in demand disrupts efficiency?

New firms enter and increase industry output until price and marginal cost are equal.

From an economic standpoint, the break-even point is the level of output at which a firm makes a(n) ______ profit.

Normal Reason: From an economic standpoint, accounting profits, which are total revenues minus explicit costs, are not considered. Break-even refers to no economic profit.

Which of the following factors will alter costs and shift the marginal cost or short-run supply curve to a new location?

Technology Prices of variable inputs

Which of the following best explains why the long-run supply curve of a constant-cost industry is perfectly elastic?

The entry and exit of firms changes industry output bringing the price back to its original level, where it is equal to the constant minimum ATC

Based on the chart, what happens at a price P3 and an output of Q3?

The firm incurs a loss but covers part of its fixed cost.

Which of the following statements is true of the firm represented by this graph?

The firm incurs a loss but should continue to operate because price exceeds the lowest average variable cost.

Which of the following describes the individual competitive firm's supply curve?

The individual firm's supply curve represents a negligible fraction of total supply and therefore cannot affect price.

What is the primary difference between the individual firm's supply curve and the industry supply curve?

The individual supply curve has no effect on price, whereas the industry supply curve has an important bearing on price.

In this graph, which curve represents the firm's short-run supply curve?

The marginal-cost curve

Which of the following best describes the economic break-even point?

The point where total revenue covers all costs, but there is no economic profit.

True or false: Efficiency within pure competition can be temporarily disrupted by a change in consumer tastes.

True Reason: Efficiency within pure competition can be temporarily disrupted by a change in consumer tastes.

Which of the following best describes marginal revenue?

The revenue that an additional unit of output contributes to total revenue.

As firms exit the industry in the long run, market price rises and the losses for the remaining firms begin to subside. Firms will continue to exit until which of the following happens?

There are no economic losses.

Multiplying product price by output reveals which of the following?

Total revenue

After a company has determined that it should produce a product and the amount of the product to produce, what basic question should it ask?

What economic profit (or loss) will we realize?

When will a firm earn an economic profit?

When price is greater than average total cost.

This figure represents a constant-cost industry where the entry or exodus of firms does not affect resource prices or unit costs. Therefore, in the long run, a decrease in demand causes ______.

a contraction of output but no change in price

A basic feature of the purely competitive market is the presence of ______.

a large number of sellers

The MR = MC rule can be applied to ______ firms; however, the rule can be restated as P = MC only when applied to ______ firms.

all; purely competitive

This figure represents a constant-cost industry where the entry or exodus of firms does not affect resource prices or unit costs. Therefore, an increase in demand causes ______.

an expansion in industry output but no alteration in price

The upward sloping supply curve in this figure represents the long-run supply curve for:

an increasing-cost industry

A specific number of firms, all with fixed plant sizes, mainly describes:

an industry's short run

A firm operating in a purely competitive market is a price taker because it ______

cannot change the market price, it can only adjust to it

An industry where expansion or contraction will not affect resource prices and production costs is known as a(n) ______.

constant-cost industry

The difference between the maximum price a consumer is willing to pay for a product and the actual price that they do pay is known as _____.

consumer surplus

The transformative effects of competition are often referred to as:

creative destruction

An unfavorable shift or ______ in demand will upset the original industry equilibrium and produce ______.

decrease; losses

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

decrease; rise

In the personal-computer industry, increasing output drives up demand for computer parts. Suppliers of these parts respond by increasing production, and economies of scale eventually drive down the prices of the parts they produce, lowering the average cost of production for computer manufacturers. This is an example of a ____-cost industry.

decreasing

True or false: A pure monopoly involves a very large number of firms producing a single unique product.

false

True or false: Quantity supplied increases as price decreases, and economic profit is usually higher at lower product prices and output.

false Reason: According to the supply schedule of the competitive firm, quantity supplied and economic profit both increase as prices rise.

An oligopoly has ___ sellers and must consider the decisions of its rivals in determining its own ___ and output.

few; price

The supply curve for an increasing-cost industry slopes upward because:

greater output will be supplied at higher prices

The shape of the long-run supply curve for a constant-cost industry can best be described as:

horizontal

The entry of new firms entering an increasing-cost industry increase resource prices particularly:

in industries using specialized resources whose long-run supplies do not readily increase in response to increases in resource demand

Productive efficiency requires that goods be produced ___.

in the least costly way

The quantity of a product supplied by a firm in pure competition should _____ as long as price rises.

increase Reason: According to the supply schedule of the competitive firm, there is a direct relationship between price and quantity supplied.

Because of the law of diminishing returns, marginal costs ______ at a(n) ______ rate at higher levels of output.

increase; increasing

In an increasing-cost industry, increases in resource prices and the minimum average total cost (ATC) are a result of ______.

increases in product demand resulting in economic profits and industry expansion

A purely competitive firm can maximize its economic profit (or minimize its loss) by adjusting only its output because it ______.

is a price taker

Consumers benefit from productive efficiency by paying the ______ product price possible under the prevailing technology and cost conditions, causing firms to earn only ______ profit.

lowest; a normal

A firm would not produce a unit of output where ______.

marginal cost exceeds marginal revenue

A firm should produce any unit of output whose ______.

marginal revenue is greater than marginal cost

In the long run, a purely competitive firm will only earn a ______ profit.

normal

When long-run equilibrium is reached, firms will earn a(n) ______ profit.

normal

In a purely competitive industry, buyers view the products of firms B, C, D and E as ______ for the product of firm A.

perfect substitutes

The MR = MC rule is known as the:

profit-maximizing rule; loss-minimizing rule

The market structure in which individual firms have the least amount of control over price is ______, whereas in ______ a single firm has significant control over price.

pure competition; pure monopoly

All firms in a(n) ______ industry share the same basic efficiency characteristics.

purely competitive

A purely competitive market leads to the efficient use of:

society's scarce resources

In the short run, a competitive industry is composed of a ______ number of firms, each with a ______, unalterable plant size.

specific; fixed

A firm should always stop producing if its average ______ cost is ______ price.

variable; greater than

Which of the following best describes a pure monopoly?

One firm selling a single unique product, where entry of additional firms is blocked and there is considerable control over price

Which of the following best describes the situation of a price-taking firm? A price-taking firm is one of a ______ number of firms producing a product that is identical to that of every other firm in the industry and providing ______ of total market supply.

large; only a fraction

A purely competitive industry has a very ______ number of sellers, whereas the other three market structures reflect a progressively ______ or ______ number of sellers.

large; smaller; decreasing

At which point will a firm be indifferent whether to shut down or continue to produce?

point B Reason: Recall that a firm will be indifferent to shutting down or producing when price is equal to minimum average variable cost.

Match each market structure with the correct description of how price control is exerted.

Purely competitive=none, Monopolistic competitive=some, but within narrow limits, Oligopoly=limited by mutual interdependence, Monopoly=considerable control

In a purely competitive industry, an increase in the price of the product produced by firm A will cause buyers to ______.

substitute with products of firms B, C, or D

The portion of a firm's marginal cost curve that lies above its average variable cost is the firm's short-run _________ curve.

Blank 1: supply

Firms within pure competition are considered to be price __________

Blank 1: takers or taker

changes in _________ (Enter one word) and changes in prices of variable inputs alter costs and shift the marginal cost or short run supply curve.

Blank 1: technology

A firm should not produce a unit of output when the marginal cost is ___________ (greater/lesser) than its marginal revenue.

Blank 1: greater, bigger, larger, more, or higher

The entry and the exit of firms in an industry are considered to be ________-run adjustments

Blank 1: long

In the short run, a purely competitive firm can maximize its economic profit (or minimize its loss) by adjusting its __________

Blank 1: output, production, supply, or quantity

In the short run, a purely competitive firm can maximize its economic profit (or minimize its loss) by adjusting its ___________

Blank 1: output, production, supply, or quantity

In pure competition, to calculate economic profit, we first calculate the difference between __________ and average total cost and then multiply it by output. (Type only one word in blank.)

Blank 1: price

If price is below a firm's minimum average _______________ cost, the firm will not operate. (Insert only one word in the blank.)

Blank 1: variable

In this table, at a price of $71, the profit-maximizing or loss-minimizing level of output is ______.

0 units Reason: At a price of $71, at every level of output, even where MR=MC, the average variable cost is greater than the price, therefore it should produce nothing (shut down).

Which of the following are true about the profit-maximizing rule of MR = MC?

1) The rule applies only if producing is preferable to shutting down. 2)The rule is an accurate guide to profit maximization for all firms regardless of their market structure. 3)The rule can be restated as P = MC when applied to a purely competitive firm because product price and MR are equal.

In a purely competitive industry, at the profit-maximizing or loss-minimizing level of output, marginal ______ is equal to ______.

1) revenue; price 2) cost; price 3) revenue; marginal cost Reason: MR=MC and MR=P, therefore, MC=P

Match each market structure with the description that best describes the conditions for exit and entry into that industry.

1) very easy, no obstacles = purely competitive 2)relatively easy matches = monopolistically competitive 3) significant obstacles matches = oligopoly 4) blocked = monopoly

Based on the information given in the table, which of the following statements are true?

1)Every unit of output up to and including the ninth unit represents greater marginal revenue than marginal cost. 2) The ninth unit of output is the profit-maximizing level of output.

Which of the following are true of purely competitive firms?

1)They produce a small fraction of total supply. 2)They are price takers. 3)They do not exert control over product price.

Confronted with the market price of its product, a purely competitive producer will ask which three questions?

1. Should we produce this product?2. If we produce this product, in what amount?3. What economic profit or loss will we realize i we produce this product?

In the table, total economic profits at the profit-maximizing level of output are calculated as a total revenue of $______ minus approximate total costs of $______.

1179; 880

Which of the following are scenarios in which a firm should continue to produce?

- Marginal revenue is $0.25 and marginal cost is $0.20. -Marginal revenue is $1.50 and marginal cost is $1.45. -Marginal revenue is $5 and marginal cost is $4.75.

Which of the following are considered to be the four basic market structures?

-Monopolistic competition -Pure competition -Oligopoly -Pure monopoly

Total revenue equals ______ times ______.

Price x Quantity

Which of the following are conditions necessary to have pure competition?

-free entry and exit -very large number of firms or sellers -standardized product

Which of the following is a characteristic of a monopolistically competitive market?

A relatively large number of sellers producing differentiated products

Which of the following best describes pure competition?

An industry involving a very large number of firms producing identical products and in which new firms can enter or exit the industry very easily.

______ revenue is the additional revenue that an additional unit of __________ would add to total revenue. (Enter one word in each blank.)

Blank 1: Marginal Blank 2: output or production

Which market structure has the fewest obstacles to entry or exit?

Pure competition

When the marginal cost of an additional unit of output exceeds the marginal revenue, what should the firm do?

Not produce that additional unit of output

In which scenario can a firm pay part, but not all, of its fixed costs and should therefore continue producing even though it is experiencing a loss?

Price exceeds average variable cost but is less than average total cost.

Which of the following improves as production increases?

Price-marginal cost relationship

In maximizing profits at 9 units of output, the firm in this graph is adhering to which of the following rules?

Produce to the point where additional units of output add positively to total profit.

Which of the following explains why a firm would not produce a unit of output where MC exceeds MR?

Producing it would add more to costs than to revenue, and profit would decline or loss would increase

In purely competitive markets, an individual firm lacks control over which factor?

Product price Reason: There are no restrictions on where a firm can locate in pure competition.

______ is relatively rare in the real world, although this market model is highly ______ to several industries.

Pure competition; relevant

The long run, every purely competitive firm tends to operate at its ______.

minimum ATC

In which market model do firms rely on product differentiation to distinguish themselves from the competition?

monopolistic competition

This graph illustrates that a firm can minimize its losses by producing where ______.

price exceeds minimum average variable cost but is less than average total cost

The two ways to determine the level of output at which a firm will realize maximum profit or minimum loss are to compare total revenue to ______ and to compare marginal revenue to ______.

total cost; marginal cost

The equation for determining economic profit or loss is ______ minus ______.

total revenue; total cost

A firm will break even where ______ will just cover ______ because the revenue per unit and the average total cost per unit are equal.

total revenue; total cost Reason: Marginal cost does not cover marginal revenue; marginal revenue covers marginal costs.