Chapter 8

In a decreasing−cost ​industry, the​ long-run industry supply curve is

downward sloping.

At the beginning of the twentieth​ century, there were many small American automobile manufacturers. At the end of the​ century, there were only three large ones. Suppose that this situation is not the result of lax federal enforcement of antimonopoly laws. How do you explain the decrease in the number of​ manufacturers? ​(Hint​: What is the inherent cost structure of the automobile​ industry?)

economies of scale​, where the​ long-run average cost of production decreases with​ output, allowing some firms to sell at a lower price.

[T/F] A firm should always produce at an output at which​ long-run average cost is minimized. Explain. This statement is

false because in the short run this may not be possible with fixed factors of production.

For a market to be perfectly​ competitive,

firms must be price​ takers, firms must produce a homogeneous​ product, and firms must be able to easily enter and exit the market.

If firms can easily enter and exit a​ market, then

firms will earn zero economic profit in the long run.

Does the seller who pays no rent have an incentive to lower the price that he charges for the vaccuum​ cleaner? The seller

has no incentive to lower price because he can sell all he wants at the market price.

Because industry X is characterized by perfect​ competition, every firm in the industry is earning zero economic profit. If the product price​ falls, no firm can survive. Do you agree or​ disagree? Discuss. This statement is

incorrect because firms will exit the industry in the long​ run, reducing supply until the price rises to the lowest point on the​ long-run average cost curve.

Assume the vitamin industry is perfectly competitive. When a new medical study shows that taking vitamins improves both the quality and length of​ life, demand for vitamins increases dramatically. As a​ result, vitamin​ producers' profits will

increase in the​ short-run but fall to zero in the​ long-run.

In an​ increasing-cost industry,

input prices increase when the industry expands and produces more output.

A good​ rule-of-thumb to determine whether a market is close to being perfectly competitive is for an industry to have at least 10 to 20 firms to be considered​ "perfectly competitive." Is this​ rule-of-thumb accurate? Explain. This​ rule-of-thumb is

not necessarily accurate because the 10 to 20 firms may collude.

If firms produce a homogeneous​ product, then

products will be perfectly substitutable with one another.

Why would a firm that incurs losses choose to produce rather than shut​ down? In a perfectly competitive​ industry, if a firm is incurring​ losses, then it might choose to produce in the short run because

revenue is greater than variable costs​, resulting in smaller losses than would result from shutting down.

The government passes a law that allows a substantial subsidy for every acre of land used to grow tobacco. How does this program affect the​ long-run supply curve for​ tobacco? The​ long-run supply curve for tobacco will

shift down because the cost of production will be lower.

Firms would enter an industry if profit will eventually be zero because zero economic profit

signifies that a firm is earning as much as it could in its next best activity

Assuming no fixed costs are avoidable in the short​ run, a perfectly competitive​ firm's short-run supply curve is

the portion of its marginal cost curve that lies above its average variable cost curve.

If firms are price​ takers, then

they will produce where price equals marginal cost.

If an increase in the demand for movies also increases the salaries of actors and​ actresses, then the​ long-run supply curve for movies is likely to be

upward sloping because increases in output raise input prices.

A firm in a highly competitive market that does not maximize its profit

will most likely go out of business or be taken over by another firm.

If all sellers charge the same price and one local seller owns the building in which he does​ business, paying no​ rent, is this seller earning a positive economic​ profit? The seller who owns his building would earn

zero economic profit because the building would have an opportunity cost.

If all sellers charge the same​ price, then in the long run they will all earn

zero economic profit or else firms would enter or exit the industry.

There are 100 firms in a perfectly competitive industry. Each firm has the​ short-run supply curve q​ = P−2 for P​ > 2, and q​ = 0 for P≤2. 1. The market supply curve for this industry is 2. If the market price is $5​, the firms in the industry will supply a total of _ units. 3. Total producer surplus is $_.

1. Q​ = 100P−200 for P​>2 and Q​ = 0 for P≤2. 2. 300 3. 450 (300 x (5-2) x 0.5)

Which of the following is NOT a basic assumption of perfect​ competition? A. All firms produce​ identical, or nearly​ identical, products. B. There is free entry and exit from the market. C. Production is characterized by significant economies of scale. D. All firms and consumers are price takers.

C. Production is characterized by significant economies of scale.

A perfectly competitive​ constant-cost industry is initially in​ long-run equilibrium. When the demand for the​ industry's product​ increases, which of the following will NOT​ occur? A. The price of the product will increase in the​ short-run. B. Firms will earn positive economic profits in the​ short-run. C. New firms will enter the market. D. The price of the product will increase in the​ long-run.

D. The price of the product will increase in the​ long-run.

Are owners of small firms or managers of large firms more likely to seek to maximize​ profit?

Owners of small firms.

If all firms in a perfectly competitive market are​ identical, which of the following is NOT a condition for​ long-run equilibrium in that​ market?

Price is above average cost for all firms.

All firms in perfectly competitive industries earn zero economic profit in the long run because

a positive profit would induce firms to​ enter, decreasing price and​ profit, and a negative profit would induce firms to​ exit, increasing price and profit.

Constant returns to scale with an​ upward-sloping long-run industry supply curve

are possible because proportional increases in inputs yielding the same proportional increase in output may induce higher input prices.

The industry supply curve is not the​ long-run industry marginal cost curve because

at prices below the minimum​ long-run average cost of​ production, firms will exit the industry.

A perfectly competitive firm is currently maximizing profit. If the cost of raw materials​ increases, the firm should

decrease output.

The assumption of profit maximization is frequently used in microeconomics.​ However, do firms always seek to maximize​ profit? Firms

do not always maximize profit because managers may instead be more concerned with payment of dividends.