econ
Suppose that as the price of Y falls from $12 to $10, the quantity of Y demanded increases from 500 to 600. Then the absolute value of the price elasticity (using the midpoint formula) is approximately
1.
The basic difference between the short run and the long run is that
at least one resource is fixed in the short run, while all resources are variable in the long run.
If the entry or exit of firms does not affect the resource prices in an industry, we refer to it as a
constant-cost industry.
The demand for a product is inelastic with respect to price if
consumers are largely unresponsive to a per unit price change.
The first, second, and third workers employed by a firm add 24, 18, and 9 units to total product, respectively. Therefore, we can conclude that
marginal product of the third worker is 9.
The graphs are for a purely competitive market in the short run. The graphs suggest that in the long run, assuming no changes in the given information,
new firms will be attracted into the industry.
If a purely competitive firm is producing at the MR = MC output level and earning an economic profit, then
new firms will enter this market.
An industry comprising 3 firms, each with about 33 percent of the total market for a differentiated product, is an example of
oligopoly.
In pure competition, if the market price of the product is higher than the minimum average total cost of the firms, then
other firms will enter the industry and the industry supply will increase.
In pure competition, if the market price of the product is lower than the minimum average total cost of the firms, then
other firms will exit the industry and the industry supply will decrease.
The basic formula for the price elasticity of demand coefficient is
percentage change in quantity demanded/percentage change in price.
A purely competitive seller is
a "price taker."
Refer to the accompanying diagram. The firm's supply curve is the segment of the
MC curve above its intersection with the AVC curve.
If economic profits in an industry are zero and implicit costs are greater than zero, then
accounting profits are greater than zero.
Refer to the diagram, which pertains to a purely competitive firm. Curve C represents
average revenue and marginal revenue.
The price elasticity of demand coefficient measures
buyer responsiveness to price changes.
A perfectly inelastic demand schedule
can be represented by a line parallel to the vertical axis.
Under what conditions would an increase in demand lead to a lower long-run equilibrium price?
The firms in the market are part of a decreasing-cost industry.
In the short run, total output in an industry
can vary as the result of using a fixed amount of plant and equipment more or less intensively.
Average fixed cost
declines continually as output increases.
Refer to the diagram and assume a single good. If the price of the good decreases from $6.30 to $5.70, consumer expenditure would
decrease if demand were D2 only.
If firms are losing money in a purely competitive industry, then the long-run adjustments in this situation will cause the market supply to
decrease, and consequently the representative firm's profits will increase.
If a purely competitive decreasing-cost industry is realizing economic losses, we can expect industry supply to
decrease, output to fall, price to rise, and profits to rise.
The demand curve in a purely competitive industry is ______, while the demand curve to a single firm in that industry is ______.
downsloping; perfectly elastic
We would expect an industry to expand if firms in that industry are
earning economic profits.
Long-run adjustments in purely competitive markets primarily take the form of
entry or exit of firms in the market.
For a purely competitive firm, total revenue
has all of these characteristics.
The MR = MC rule applies
in both the short run and the long run.
If the demand for bacon is relatively elastic, a 10 percent decline in the price of bacon will
increase the amount demanded by more than 10 percent.
If the price elasticity of demand for a product is 2.5, then a price cut from $2.00 to $1.80 will
increase the quantity demanded by about 25 percent.
If the price elasticity of demand for a product is 2, then a price cut from $4.00 to $3.00 will
increase the quantity demanded by about 50 percent.
If the demand for product X is inelastic, a 20 percent decrease in the price of X will
increase the quantity of X demanded by less than 20 percent.
Suppose that the total-revenue curve is derived from a particular linear demand curve. That demand curve must be
inelastic for price declines that increase quantity demanded from 6 units to 7 units.
The price of product X is reduced from $100 to $90 and, as a result, the quantity demanded increases from 50 to 60 units. Therefore, demand for X in this price range
is elastic.
The marginal revenue curve of a purely competitive firm
is horizontal at the market price.
If a firm increases all of its inputs by 10 percent and its output increases by 9 percent, then
it is encountering diseconomies of scale.
We use the midpoint formula in computing the price elasticity of demand coefficient in order to
make the coefficient value become independent of whether price goes up or down.
In the diagram, curves 1, 2, and 3 represent the
marginal, average, and total product curves respectively.
Assume that the market for soybeans is purely competitive. Currently, firms growing soybeans are earning positive economic profits. In the long run, we can expect
new firms to enter, causing the market price of soybeans to fall.
The diagram shows two product demand curves. On the basis of this diagram, we can say that
over range P1P2, price elasticity of demand is greater for D1 than for D2.
A firm can sell as much as it wants at a constant price. Demand is thus
perfectly elastic.
The demand schedule or curve confronted by the individual, purely competitive firm is
perfectly elastic.
In the short run, a purely competitive seller will shut down if
price is less than average variable cost at all outputs.
The market for agricultural products such as wheat or corn would best be described by which market model?
pure competition
Which market model assumes the least number of firms in an industry?
pure monopoly
Production costs to an economist
reflect opportunity costs.
If the price of bottled water is $1.50 and the marginal cost of producing it is $1.00,
resources are being underallocated to bottled water.
If the long-run supply curve of a purely competitive industry slopes upward, this implies that the prices of relevant resources
rise as the industry expands.
The accompanying graphs are for a purely competitive market in the short run. The graphs suggest that in the long run, as automatic market adjustments occur, the demand curve facing the individual firm will
shift down.
When LCD televisions first came on the market, they sold for at least $1,000, and some for much more. Now many units can be purchased for under $400. These facts imply that
the LCD television industry is a decreasing-cost industry.
Marginal product is
the change in total output attributable to the employment of one more worker.
Implicit and explicit costs are different in that
the former refer to nonexpenditure costs and the latter to monetary payments.
If a variable input is added to some fixed input, beyond some point the resulting extra output will decline. This statement describes
the law of diminishing returns.
Economists use the term imperfect competition to describe
those markets that are not purely competitive.
Refer to the diagram, which pertains to a purely competitive firm. Curve A represents
total revenue only.
Suppose the total-revenue curve is derived from a particular linear demand curve. That demand curve must be
unit elastic for price increases that reduce quantity demanded from 5 units to 4 units.
The diagram of product curves suggests that
when marginal product lies above average product, average product is rising.
If a firm in a purely competitive industry is confronted with an equilibrium price of $5, its marginal revenue
will also be $5.
The following is cost information for the Creamy Crisp Donut Company. Entrepreneur's potential earnings as a salaried worker = $50,000 Annual lease on building = $22,000 Annual revenue from operations = $380,000 Payments to workers = $120,000 Utilities (electricity, water, disposal) costs = $8,000 Value of entrepreneur's talent in the next best entrepreneurial activity = $80,000 Entrepreneur's forgone interest on personal funds used to finance the business = $6,000 Creamy Crisp's implicit costs, including a normal profit, are
$136,000.
Suppose that Joe sells pork in a purely competitive market. The market price of pork is $2 per pound. Joe's marginal revenue from selling the 25th pound of pork would be
$2.
The total revenue of a purely competitive firm from selling 200 units of output is $1,000. Based on this information, the unit price of the output must be
$5.
Plant sizes get larger as you move from ATC-1 to ATC-4. Which plant size would produce at the least cost for the 1,500-2,500 range of output?
ATC-1
What do wages paid to factory workers, interest paid on a bank loan, forgone interest, and the purchase of component parts have in common?
All are opportunity costs.
Fixed cost is
any cost that does not change when the firm changes its output.
The law of diminishing returns indicates that
as extra units of a variable resource are added to a fixed resource, marginal product will decline beyond some point.
A purely competitive firm currently producing 35 units of output earns marginal revenues of $40 from each extra unit of output it sells. If it sells 40 units, then its total revenues would be
$1,600.
The following is cost information for the Creamy Crisp Donut Company. Entrepreneur's potential earnings as a salaried worker = $40,000 Annual lease on building = $25,000 Annual revenue from operations = $420,000 Payments to workers = $150,000 Utilities (electricity, water, disposal) costs = $8,000 Value of entrepreneur's talent in the next best entrepreneurial activity = $80,000 Entrepreneur's forgone interest on personal funds used to finance the business = $6,000 Creamy Crisp's implicit costs, including a normal profit, are
$126,000.
The following is cost information for the Creamy Crisp Donut Company. Entrepreneur's potential earnings as a salaried worker = $60,000 Annual lease on building = $30,000 Annual revenue from operations = $250,000 Payments to workers = $100,000 Utilities (electricity, water, disposal) costs = $8,000 Value of entrepreneur's talent in the next best entrepreneurial activity = $80,000 Entrepreneur's forgone interest on personal funds used to finance the business = $6,000 Creamy Crisp's explicit costs are
$138,000.
The following is cost information for the Creamy Crisp Donut Company. Entrepreneur's potential earnings as a salaried worker = $50,000 Annual lease on building = $22,000 Annual revenue from operations = $380,000 Payments to workers = $120,000 Utilities (electricity, water, disposal) costs = $8,000 Value of entrepreneur's talent in the next best entrepreneurial activity = $80,000 Entrepreneur's forgone interest on personal funds used to finance the business = $6,000 Creamy Crisp's explicit costs are
$150,000.
Suppose that as the price of Y falls from $15 to $12, the quantity of Y demanded increases from 200 to 220. Then the absolute value of the price elasticity (using the midpoint formula) is approximately
0.43.
Refer to the diagram and assume a single good. If the price of the good increased from $5.70 to $6.30 along D1, the price elasticity of demand along this portion of the demand curve would be
1.2.
Suppose that as the price of Y falls from $2.00 to $1.90, the quantity of Y demanded increases from 110 to 118. Then the absolute value of the price elasticity (using the midpoint formula) is approximately
1.37.
A constant-cost industry is one in which
100 units can be produced for $100, then 150 can be produced for $150, 200 for $200, and so forth.
Assume a purely competitive decreasing-cost industry is initially in long-run equilibrium, producing 11 million units at a market price of $7.00. Suppose that an increase in consumer demand occurs. After all economic adjustments have been completed, which output and price combination is most likely to occur?
12.5 units at a price of $6.75.
Refer to the diagram. Between prices of $5.70 and $6.30,
D1 is more elastic than D2.
Which of the following distinguishes the short run from the long run in pure competition?
Firms can enter and exit the market in the long run but not in the short run.
Refer to the accompanying diagram. The firm will shut down at any price less than
P1.
What happens in a decreasing-cost industry when some firms leave and the industry's output contracts?
The average cost will increase.
Economic cost can best be defined as
a payment that must be made to obtain and retain the services of a resource.
For a purely competitive seller, price equals
all of these.
Suppose we find that the price elasticity of demand for a product is 3.5 when its price is increased by 2 percent. We can conclude that quantity demanded
decreased by 7 percent.
Suppose Aiyanna's Pizzeria currently faces a linear demand curve and is charging a very high price per pizza and doing very little business. Aiyanna now decides to lower pizza prices by 5 percent per week for an indefinite period of time. We can expect that each successive week,
demand will become less price elastic.
Suppose that the corn market is purely competitive. If the corn farmers are currently earning positive economic profits, then we would expect that in the long run the firm's
demand will decrease.
Total fixed cost (TFC)
does not change as total output increases or decreases.
Price is taken to be a "given" by an individual firm selling in a purely competitive market because
each seller supplies a negligible fraction of the total market.
Price is constant to the individual firm selling in a purely competitive market because
each seller supplies a negligible fraction of total supply.
The primary force encouraging the entry of new firms into a purely competitive industry is
economic profits earned by firms already in the industry.
To the economist, total cost includes
explicit and implicit costs.
If the demand for product X is inelastic, a 4 percent decrease in the price of X will
increase the quantity of X demanded by less than 4 percent.
Which idea is inconsistent with pure competition?
product differentiation
Suppose that a business incurred implicit costs of $500,000 and explicit costs of $5 million in a specific year. If the firm sold 100,000 units of its output at $50 per unit, its accounting Multiple Choice
profits were $0 and its economic losses were $500,000.
Long-run competitive equilibrium
results in zero economic profits.
Suppose a firm in a purely competitive market discovers that the price of its product is above its minimum AVC point but everywhere below ATC. Given this, the firm
should continue producing in the short run but leave the industry in the long run if the situation persists.
A firm sells a product in a purely competitive market. The marginal cost of the product at the current output of 1,500 units is $6.50. The minimum possible average variable cost is $5.00. The market price of the product is $4.50. To maximize profits or minimize losses, the firm should
shut down.
If at the MC = MR output, AVC exceeds price,
some firms should shut down in the short run.
The lowest point on a purely competitive firm's short-run supply curve corresponds to
the minimum point on its AVC curve.
If a firm can sell 3,000 units of product A at $10 per unit and 5,000 at $8, then
the price elasticity of demand is approximately 2.25.
Accounting profits equal total revenue minus
total explicit costs.
The representative firm in a purely competitive industry
will earn zero economic profit in the long run.