ECON 102 CHAPTER 11
Suppose that the pen-making industry is perfectly competitive. Also suppose that each current firm and any potential firms that might enter the industry all have identical cost curves, with minimum ATC = $1.25 per pen. If the market equilibrium price of pens is currently $1.50, what would you expect it to be in the long run?
$1.25
Suppose that as the output of mobile phones increases, the cost of touch screens and other component parts decreases. If the mobile phone industry features pure competition, we would expect the long-run supply curve for mobile phones to be:
Downward sloping.
A firm in a purely competitive industry is currently producing 1,400 units per day at a total cost of $600. If the firm produced 1,200 units per day, its total cost would be $400, and if it produced 900 units per day, its total cost would be $375.
a. What are the firm's ATC at these three levels of production? At 1,400 units per day, ATC = $0.43 At 1,200 units per day, ATC = $0.33 At 900 units per day, ATC = $0.42 b. If every firm in this industry has the same cost structure, is the industry in long-run competitive equilibrium? No c. From what you know about these firms' cost structures, what is the highest possible price per unit that could exist as the market price in long-run equilibrium? $0.33 d. If that price ends up being the market price and if the normal rate of profit is 10 percent, then how big will each firm's accounting profit per unit be? 3.30 cents per unit.
A firm in a purely competitive industry has a typical cost structure. The normal rate of profit in the economy is 5 percent. This firm is earning $5.50 on every $50 invested by its founders.
a. What is its percentage rate of return? 11 percent. b. Is the firm earning an economic profit? Yes If so, how large? 6 percent. c. Will this industry see entry or exit? Entry d. What will be the rate of return earned by firms in this industry once the industry reaches long-run equilibrium? 5 percent.
In the long run in a purely competitive industry,
entry and exit of firms can occur.
Consider the following statement: "Ninety percent of new products fail within two years—so you shouldn't be so eager to innovate." This statement is
false because a firm could capture enough expected economic profit in the short run to cover the initial investment.
If all firms only earn a normal profit in the long run, firms will develop new products or lower-cost production methods because they can
innovate and possibly earn an economic profit in the short run.
Price can be substituted for marginal revenue in the MR = MC rule when an industry is purely competitive because price
is constant regardless of the quantity demanded.
Entry and exit help to improve resource allocation because
losses result in exit and release resources to flow to markets where there are profits.
The equality of marginal revenue and marginal cost is essential for profit maximization in all market structures because if
marginal revenue and marginal cost are equal, any other output level will result in reduced profit.
Profits encourage entry into purely competitive industries and losses encourage exit from purely competitive industries because
when profits are zero, the firm is earning sufficient revenue to cover the opportunity cost.
