ECON Chapter 9 Study Guide

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When are firms likely to enter an​ industry? When are they likely to​ exit?

Economic profits attract firms to enter an​ industry, and economic losses cause firms to exit an industry.

​"In a perfectly competitive​ market, in the long run consumers benefit from reductions in​ costs, but firms​ don't." ​Don't firms also benefit from cost reductions because they are able to earn greater​ profits?

No. Because​ short-run profits encourage​ entry, firms earn zero economic profit in the long run.

Which of the following are perfectly competitive markets? Manufacturing Computers

Perfectly Competitive: No Number of Firms: Few Type of Product: Differentiated Ease of Entry: Low

Now assume the top figure on the right shows the cost of production for a representative firm in the cocoa industry. The bottom figure shows the market for this industry.

Picture 17, 18, 19, 20, 21, and 22

Which of the following terms best describes the result of the forces of competition driving the market price to the minimum average cost of the typical​ firm?

Productive efficiency

Based on the numbers in the table​ below, how many bushels should this farmer produce in order to maximize​ profit?

Question 2a Question 2b

In perfect​ competition, long-run equilibrium occurs when the economic profit is

Zero

A student​ argues: ​"To maximize profit​, a firm should produce the quantity where the difference between marginal revenue and marginal cost is the greatest. If a firm produces more than this​ quantity, then the profit made on each additional unit will be​ falling." Is the above statement true or​ false?

False. Profit is maximized at the output level where marginal revenue equals marginal cost.

Consider the graph below showing the market demand and supply for corn.Use the line drawing tool to graph the demand for the corn produced by one corn farmer. Properly label this line.

Picture 1

Why are consumers so powerful in a market​ system?

Because it is​ consumers' demand that influences the market price and dictates what producers will supply in the market.

In a perfectly competitive industry with increasing average​ costs, the​ long-run supply curve will be Which of the graphs above best depicts an industry in which the typical​ firm's average costs decrease as the industry expands​ production?

Upward sloping The graph on the left

Hedrick Smith was a foreign correspondent for the New York Times who lived in the Soviet Union in the​ 1970s, a period when the country had a planned economy rather than a market system. In a book he wrote about everyday life in the Soviet​ Union, Smith made the following observations about shopping in​ Moscow: At first it seemed...that the stores were pretty well stocked. Only as we began to shop in earnest...did the Russian​ consumer's predicament really come through to me.​ First, we needed textbooks for our children...and found that the​ sixth-grade textbooks had run out.... We tried to find ballet shoes for our​ 11-year-old daughter...only to discover that in this land of​ ballerinas, ballet shoes size 8 were unavailable in Moscow.... I tried to find shoes for myself. They were out of anything in my size but sandals or​ flimsy, lightweight shoes that the​ clerk, with one look at​ me, recommended against buying.​ "They won't​ last," he admitted. Judging by​ Smith's observations, did the Soviet Union achieve allocative efficiency in the production of​ sixth-grade textbooks, ballet​ shoes, and​ men's shoes? Briefly explain. Can we tell from these observations whether the Soviet Union achieved productive efficiency in the production of​ sixth-grade textbooks, ballet​ shoes, and​ men's shoes? Briefly explain.

​No, it did not achieve allocative efficiency because the marginal benefit was greater than the marginal cost of production. The Soviet Union may or may not have achieved productive​ efficiency, depending on average costs.

By​ 2017, McDonald's had stopped selling Chicken McNuggets and other products made from chickens fed antibiotics. The change increased​ McDonald's costs, but an article in the Wall Street Journal noted that​ "...McDonald's ability to raise its prices is limited because of stiff​ competition." Does this​ "stiff competition" mean that the demand curve for​ McDonald's Chicken McNuggets is​ horizontal? Briefly explain.

​No, the demand curve is not horizontal because Chicken McNuggets are not identical to other chicken products.

Suppose you decide to open a copy store. You rent store space​ (signing a​ one-year lease), and you take out a loan at a local bank and use the money to purchase 10 copiers. Six months​ later, a large chain opens a copy store two blocks away from yours. As a​ result, the revenue you receive from your copy​ store, while sufficient to cover the wages of your employees and the costs of paper and​ utilities, doesn't cover all of your rent and the interest and repayment costs on the loan you took out to purchase the copiers. Should you continue operating your​ business?

​Yes, because you are covering your variable costs.

A buyer or seller that is unable to affect the market price is called

A price taker

Refer to the graph to the right of the demand curve facing a firm in the perfectly competitive market for wheat. The fact that the demand curve is horizontal implies which of the​ following?

The firm can sell any amount of output as long as it accepts the market price of​ $7.00

Why do single firms in perfectly competitive markets face horizontal demand​ curves?

With many firms selling an identical​ product, single firms have no effect on market price.

What are the three conditions for a market to be perfectly competitive? For a market to be perfectly​ competitive, there must be

many buyers and​ sellers, with all firms selling identical​ products, and no barriers to new firms entering the market.

The increase in total revenue that results from selling one more unit of output is What is the relationship between​ price, average​ revenue, and marginal revenue for a firm in a perfectly competitive​ market?

marginal revenue Price is equal to both average revenue and marginal revenue.

Would a firm earning zero economic profit continue to​ produce, even in the long​ run? In​ long-run competitive​ equilibrium, a firm earning zero economic profit

Will continue to produce because such profit corresponds with positive accounting profit.

The market for corn is perfectly competitive with​ 1,000 farmers. Suppose the farmers have identical​ short-run cost​ curves, which are illustrated in the figure below. Describe the​ market's supply curve.

Picture 11

The figure to the right represents the cost structure for a perfectly competitive firm with its average total cost​ (ATC) curve, average variable​ (AVC) curve, and marginal cost​ (MC) curve. Fixed costs are​ $50.00. Suppose the market price is ​$11.00 per unit. Characterize the​ firm's profit. If the firm produces​ output, then it will

Experience losses Shut down because price is less than average variable cost. OR continue to produce because price is greater than average variable cost.

Explain why it is true that for a firm in a perfectly competitive market that P​ = MR​ = AR. In a perfectly competitive​ market, P​ = MR​ = AR because

Firms can sell as much output as they want at the market price.

What determines entry and exit of firms in a perfectly competitive industry in the long​ run? In a perfectly competitive industry in the long​ run,

New firms will enter if existing firms are making a profit and existing firms will exit if they are experiencing losses.

Suppose​ that, at the beginning of the​ year, the price of corn is​ $3.80 per bushel and 14 billion bushels are harvested. There are approximately​ 400,000 corn​ farmers, so the average output per farmer is about​ 35,000 bushels. At the beginning of the​ year, the average corn farmer produced ______% of the total corn production. ​Initially, after the introduction of the new​ fertilizer, individual farmers selling corn are able to earn ______ profit. This will result in ______ the corn​ market, which will cause the ______ supply curve to shift to the ______ and will cause the market price to ________. At the new market​ price, corn farmers are earning _______ economic profit.

(35,000/14,000,000,000)×100 = 0.00025%. Picture 23 and 24 an economic; entry into; market; right; fall; zero

A columnist for the Wall Street Journal discussed how some firms were buying existing drilling operations in Canadian oil sands regions. These operations would not be profitable to build from scratch but were profitable to operate given that they were already built​ because, as the columnist​ said: "The key is the distinction between fixed and variable costs. While the fixed investment in new oil sands projects is​ prohibitive, variable costs can be in the low​ $20 range​ (say, $24​) per​ barrel." The columnist estimated that the fixed cost of a new oil sands drilling operation could be $95 per barrel. At the time the column was​ written, the price of oil was about $50 per barrel. Assuming that the variable cost of an existing oil sands operation is $24 per barrel and the price of oil is $50 barrel, the companies selling their operations were losing ​$____ per barrel. At a price of $50 per​ barrel, were the companies buying the existing oil sands operations earning a profit of $26 per​ barrel? If​ not, explain what information we would need to calculate their profit.

-69 (50-24-95) We would need information on the cost of buying the existing operations to determine profits.

Suppose that Andy sells basketballs in the perfectly competitive basketball market. His output per day and his costs are as​ follows: Suppose the equilibrium price of basketballs is​ $2.50. In the short​ run, how many basketballs will Andy​ produce? _______

0 -10 (check TC top row)

At what market price will the wheat farmer break​ even? The wheat farmer will break even at a price of $_______ per bushel. If the market price for wheat were indeed ​$5 per​ bushel, should the wheat farmer exit the industry in the long​ run? In the long​ run, the wheat farmer

5 (find the middle point and then the dollar amount) Should continue to produce wheat because breaking even is as high a return as she could earn elsewhere.

Suppose the figure to the right illustrates the​ long-run average cost curve ​(AC​) and the marginal cost curve ​(MC​) for a representative firm in a perfectly competitive market. Assume all firms in the industry have the same cost structure. The other figure illustrates the​ market, with a market supply curve ​(S​) and a market demand curve ​(D​). How many firms are there​ initially? The industry has ________ firms. Will new firms enter or will existing firms exit in the long​ run? In the long​ run, firms will _______. How many firms will there be at the​ long-run equilibrium? In the​ long-run equilibrium, there will be _______ firms.

50 Enter 160

Which of the following are perfectly competitive markets? Manufacturing MP3 Players

Perfectly Competitive: No Number of Firms: Few Type of Product: Differentiated Ease of Entry: Low

Sony suffered losses selling televisions from 2004 to​ 2013, before finally earning a small profit on this business from 2014 to 2016. Given the strong consumer demand for​ plasma, LCD, and LED television​ sets, shouldn't Sony have been able to raise prices to earn a profit during that decade of​ losses? Illustrate on the graph to the right how an increase in demand could result in a lower market price.

Picture 26

The figure to the right illustrates the average total cost​ (ATC) and marginal cost​ (MC) curves for an apple farmer. Assume the market for apples is perfectly competitive. If the market price for apples is ​$42.00 per​ crate, then what will be this apple​ farmer's profit?

Picture 28

The graph to the right shows a firm in a perfectly competitive market making a profit. The graph includes the​ firm's marginal cost​ curve, average total cost​ curve, and average variable cost curve. Assume the market price is ​$28

Picture 3

Assume the market price is ​$24. The graph to the right shows a firm in a perfectly competitive market operating at a loss. The graph includes the​ firm's marginal cost​ curve, average total cost​ curve, and average variable cost curve.

Picture 4

Frances sells pencils in the perfectly competitive pencil market. Her output per day and costs are seen in the table to the right. a. If the current equilibrium price in the pencil market is ​$1.70​, what price will Frances​ charge? b. Find the correct quantities for the missing values in the​ table, as represented by ​(i​, ii​, iii​, and ​iv; enter all values as dollars and cents​). ​ (i​) Marginal revenue is $_______. (ii​) Total revenue is $_______. (iii) Marginal revenue is $_______. (iv​) Total revenue is $_______. c. What quantity of pencils will maximize​ Frances' profit?_______ pencils.

Picture 5 a. $1.70 b(i). 1.70 (change on each thing for TR) b(ii). 6.80 (MR times the Output per day) b(iii). 1.70 (the MR row number) b(iv). 11.90 (MR times the Output per day) c. 6 (TR - TC and find the biggest difference)

The graph to the right represents the situation of​ Marguerite's Caps, a firm selling caps in the perfectly competitive cap industry. In order to maximize her​ profits, Marguerite should produce ______ caps. At the​ profit-maximizing level of​ output, she will earn a profit of ​$_______. Suppose Marguerite decides to shut down. Her loss would be $_______.

Picture 9 100 200 (Total profit is equal to price​ ($11) minus average total cost​ ($9) multiplied by the​ profit-maximizing quantity​ (100). Profit equals​ $200.) 300 (At an output level of​ 100, this is ​($9−​$6) × 100 = $300.)

If a perfectly competitive firm is producing at point A​, in the graph to the​ right, which of the following is​ true? What does the shaded area in the second graph to the right represent for a perfectly competitive firm that produces at output level Q​?

The firm earns zero economic profit. Negative economic profit

Refer to the graphs above. Suppose the graph on the left represents a typical​ firm's supply curve in a perfectly competitive​ industry, and there are 100 identical firms in the industry. What does the graph on the right​ represent?

The market supply curve

Assume the market for oranges is perfectly competitive. If the demand for oranges​ increases, will the market supply additional​ oranges? If the demand for oranges​ increases, then the market

Will supply additional oranges because producers seek the highest return on their investments.

Discuss the shape of the​ long-run supply curve in a perfectly competitive market. The​ long-run supply curve is Suppose that the perfectly competitive market illustrated in the graph to the right is initially in​ long-run equilibrium​ (at P1​) and then there is a permanent increase in the demand for the product​ (D2​). Show how the market adjusts in the long run.

A horizontal line equal to the minimum point on the typical​ firm's average total cost curve. Picture 12

Refer to the graphs above. What do you expect to happen in this market as it approaches​ long-run equilibrium? If the market demand curve shifts to the​ right, how will a competitive​ firm's level of output​ change? A perfectly competitive firm is losing money in the short​ run, and its price is less than its average variable cost. In order to minimize its losses in the short​ run, this firm should

A shift to the right of the market supply curve as new firms enter. The firm will increase its​ output, and its profits will increase. Shut down.

Matthew Rafferty produces hiking boots in the perfectly competitive hiking boot market. The table contains information on​ Rafferty's total costs. Fill in the missing values for​ AFC, AVC,​ ATC, and MC in the table. Suppose the equilibrium price in the hiking boot market is ​$120.00. In order to maximize​ profit, Rafferty should produce ________ boots, charge a price of ​$______​, and earn the optimal profit of ​$________. Suppose the equilibrium price in the hiking boot falls to ​$85.00. In order to maximize​ profit, Rafferty should now produce _______ ​boots, charge a price of ​$______​, and earn the optimal profit of ​$_______. Suppose the equilibrium price in the hiking boot falls to $50.00. In order to maximize​ profit, Rafferty should now produce _______ boots, charge a price of $_______​, and earn the optimal profit of $_______.

AFC= Fixed Cost (number at top of YC column)/ Output AVC= Variable Cost/ Output ATC= Total costs/ output MC= change in total costs/ change in output

Which of the following terms best describes a state of the economy in which production reflects consumer​ preferences? ​Long-run equilibrium in perfect competition results in

Allocative efficiency Both A and B.

What is the difference between a​ firm's shutdown point in the short run and its exit point in the long​ run? In the short​ run, a​ firm's shutdown point is the minimum point on the Why are firms willing to accept losses in the short run but not in the long​ run?

Average variable cost​ curve, while in the long​ run, a​ firm's exit point is the minimum point on the average total cost curve. There are sunk costs in the short run but not in the long run.

What is the relationship between a perfectly competitive​ firm's marginal cost curve and its supply​ curve?

A​ firm's marginal cost curve is equal to its supply curve for prices above average variable cost.

Which of the following statements is true when the difference between TR and TC is at its maximum positive​ value?

Both A and B are true.

How does perfect competition lead to allocative and productive​ efficiency? Perfect competition leads to allocative and productive efficiency

Both a and b.

How is the market supply curve derived from the supply curves of individual​ firms? The market supply curve is derived

By horizontally adding the individual​ firms' supply curves.

In​ 2017, Apple reported that since its iTunes App Store had opened in​ 2008, third-party app developers had earned more than​ $60 billion and currently employed 1.4 million people.​ Yet, as​ we've seen, because of intense​ competition, many game developers can only break even on the games they develop. If game companies can only break even on the mobile games they​ develop, in the long​ run, we would expect them to

Continue to develop mobile games because they can cover all costs of production if they break even.

An article in the Wall Street Journal discussing the financial results for General Electric Co.​ (GE) for the first quarter of 2017 reported​ that, compared with the same quarter in the previous​ year, the​ firm's revenue had fallen from​ $27.94 billion to​ $27.66 billion, while its profit had increased from​ $228 million to​ $653 million. It is possible for profits to increase even if revenue decreases if How can GE best maximize its​ profit?

Costs decrease more than revenue decreases. Increase revenues and cut costs.

Suppose an assistant professor of economics is earning a salary of ​$60,000 per year. One day she quits her​ job, sells ​$105,000 worth of bonds that had been earning 4 percent per​ year, and uses the funds to open a bookstore. At the end of the​ year, she shows an accounting profit of ​$85,000 on her income tax return. What is her economic​ profit? Her economic profit for the year is ​$________

Economic Profit= 85,000- (60,000+105,000 x (4/100))

The figure to the right represents the cost structure for a perfectly competitive firm with its average total cost​ (ATC) curve, average variable​ (AVC) curve, and marginal cost​ (MC) curve. Suppose the market price is ​$17.00 per unit. Will firms enter or exit the industry in the long​ run? If market price is ​$17.00​, then firms will ______ the market in the long run. What effect will firms entering have on the market​ price? When firms enter​,

Enter Market supply will increase​, decreasing price OR exit Market supply will decrease​, increasing price

The figure on the left represents the cost structure for a perfectly competitive wheat farmer with her average total cost​ (ATC) curve and marginal cost​ (MC) curve-this ​firm's cost curves are representative of most firms in the market. The figure on the right represents the market for wheat. Characterize profits for the firms in this industry. Firms in this market are currently The​ long-run equilibrium price will be $______. In​ long-run, firms will ______ the market until the marginal firm is earning ______.

Experiencing losses (look at both graphs, if right graph has a lower middle price its this answer) 5 (find center point of curved graph) Exit; zero economic profit

In a perfectly competitive industry with constant​ costs, the​ long-run supply curve will be

Horizontal

Is the following statement correct or​ incorrect? ​"According to the model of perfectly competitive markets, the demand for wheat should be a horizontal line. But this​ can't be​ true: When the price of wheat​ rises, the quantity of wheat demanded​ falls, and when the price of wheat​ falls, the quantity of wheat demanded rises.​ Therefore, the demand for wheat is not a horizontal​ line."

Incorrect. The commentator is confusing the market demand for wheat with the demand line facing the representative firm.

What is meant by allocative​ efficiency? Allocative efficiency is when every good or service What is meant by productive​ efficiency? Productive efficiency is Briefly discuss the difference between these two concepts.

Is produced up to the point where the marginal benefit for consumers equals the marginal cost of producing it. When a good or service is produced at lowest possible cost. Productive efficiency pertains to production within an industry while allocative efficiency pertains to production across all industries.

In​ 2017, two beer drinkers in California filed a lawsuit against Kona Brewing​ Company, which sells Kona beer. The beer drinkers claimed that Kona was marketed as if it were brewed in​ Hawaii, but the beer is actually brewed in​ Oregon, Washington,​ Tennessee, and New Hampshire. If the market for beer were perfectly​ competitive, the location of breweries would

Not matter to consumers since the product would be homogeneous.

Which of the following are perfectly competitive markets? Bridge Building

Perfectly Competitive: No Number of Firms: Few Type of Product: Differentiated Ease of Entry: Low

Which of the following are perfectly competitive markets? Office Building Construction

Perfectly Competitive: No Number of Firms: Few Type of Product: Differentiated Ease of Entry: Low

Which of the following are perfectly competitive markets? Retail Bookselling

Perfectly Competitive: No Number of Firms: Many Type of Product: Differentiated Ease of Entry: High

Which of the following are perfectly competitive markets? Sub Sandwich Shops

Perfectly Competitive: No Number of Firms: Many Type of Product: Differentiated Ease of Entry: High

Consider a firm in each of the following three​ situations, and explain whether the firm will produce in the short run or shut down in the short run. In situation​ 1, the firm should In situation​ 2, the firm should In situation​ 3, the firm should

Produce​ 1,000 units of output and break even with a price of​ $10.00. Produce​ 1,000 units of output at a loss since the price is less than the average total cost. Shut down since the price is less than the average variable cost.

Which of the following is an expression of profit for a perfectly competitive​ firm? Profit for a perfectly competitive firm can be expressed as

Profit= (P−ATC)×Q​, where P is ​price, Q is output, and ATC is average total cost. OR Profit= (P×Q)−(ATC×Q)​, where P is ​price, Q is output, and ATC is average total cost.

Suppose the price of wheat rises to ​$6.00 per bushel. Farmer Parker will maximize profits by producing nothing bushels of wheat ​(enter a whole​ number). He will make a profit of $_______

Question 1a Question 1b

Farmer Parker will maximize profits by producing ______ bushels of wheat ​(enter a whole​ number). Suppose that the marginal cost of wheat increases by​ $0.50 for every bushel of wheat produced. For​ example, the marginal cost of producing the eighth bushel of wheat is now $6.50. Will this increase in marginal cost change the​ profit-maximizing level of production for Farmer​ Parker? How much profit will Farmer Parker make​ now? $__________

Question 3a No Question 3b (Picture 2)

Farmer​ Parker's profit-maximizing level of production is 6 bushels of wheat. At this level of production he produces following the rule Marginal Revenue​ = Marginal Cost and earns the maximum possible profit of $8.00. Farmer​ Parker's fixed costs are ​$________ Suppose that fixed costs increase by ​$0.50. Farmer​ Parker's new​ profit-maximizing level of production after the increase in fixed costs is _______ bushels of wheat. The amount of profit that Farmer Parker will earn after the increase in fixed costs is ​$________. ​(Enter your response rounded to two decimal​ places.)

Question 4a Question 4b

Farmer Jones grows oranges in Florida. Suppose the market for oranges is perfectly competitive and that the market price for a crate of oranges is ​$19 per crate. Fill in total​ revenue, average​ revenue, and marginal revenue in the table below.

Question 5

What is the supply curve for a perfectly competitive firm in the short​ run? The supply curve for a firm in a perfectly competitive market in the short run is

That​ firm's marginal cost curve for prices at or above average variable cost.

How should firms in perfectly competitive market decide how much to​ produce? Perfectly competitive firms should produce the quantity where

The difference between total revenue and total cost is as large as possible.x

Refer to the graph to the right of the costs for a perfectly competitive firm. Which of the following best represents profit per unit of​ output? Which of the following best represents total​ profit?

The distance between points A and B The shaded rectangle

Explain why it is true that for a firm in a perfectly competitive​ market, the​ profit-maximizing condition MR​ = MC is equivalent to the condition P​ = MC. When maximizing​ profits, MR​ = MC is equivalent to P​ = MC because

The marginal revenue curve for a perfectly competitive firm is the same as its demand curve.

In the figure to the​ right, Sacha Gillette reduces her output from 7000 to 5000 dozen eggs when the price falls to ​$2.20. At this price and this output​ level, she is operating at a loss. What option does Gillette have in this​ situation?

Try to cut her costs of production to decrease the loss in the short run.

According to an article in the Wall Street Journal​, in 2007 the insurance company AXA Equitable signed a​ long-term lease on 2 million square feet of office space in a skyscraper on Sixth Avenue in Manhattan in New York City. In​ 2013, AXA decided that it only needed 1.7 million square feet of office​ space, so it subleased​ 300,000 square feet of space to several other firms. Although AXA is paying a rent of​ $88 per square foot on all 2 million square feet it is​ leasing, it is only receiving​ $40 per square foot from the firms subleasing the​ 300,000 square feet. ​AXA's actions might make economic sense in the short run if​ AXA's ​AXA's actions could make economic sense in the long run if​ AXA's

Variable cost per square foot was equal to or less than​ $40. Total cost per square foot is equal to​ $40 or less.

The chapter​ states, ​"Firms will supply all those goods that provide consumers with a marginal benefit at least as great as the marginal cost of producing​ them." A student objects to this statement by making the following​ argument: "I doubt that firms will really do this. After​ all, firms are in business to make a​ profit; they​ don't care about what is best for​ consumers." After reminding the class that we are assuming a competitive​ market, your professor would most likely give the following reply.

While​ it's true that firms​ don't care about consumer​ welfare, they do maximize profits by producing the efficient level of output.

The graph at right represents the situation of Karl​ Kumquats, a kumquat grower. Karl is earning ​Karl's firm illustrates

Zero economic​ profit, but could have a positive accounting profit. Productive efficiency because price equals average total cost and allocative efficiency because marginal revenue equals marginal cost.

What is a price​ taker? A price taker is When are firms likely to be price​ takers? A firm is likely to be a price taker when

a firm that is unable to affect the market price it sells a product that is exactly the same as every other firm OR it represents a small fraction of the total market

The graph to the right represents the situation of a perfectly competitive firm. Determine the areas on the graph that represent the​ following: a. Total cost is represented by area ____ b. Total revenue is represented by area ___ c. Variable cost is represented by area ___ d. ___ is represented by area ___

a. A+B+C b. A+B c. A d. Loss;C

Suppose that the market for​ gluten-free spaghetti is in​ long-run equilibrium at a price of​ $3.50 per box and a quantity of 4 million boxes sold per year. Assume that the production of​ gluten-free spaghetti is a​ constant-cost industry. If the demand for​ gluten-free spaghetti increases​ permanently, which of the following combinations of equilibrium price and equilibrium quantity would you expect to see in the long​ run?

b. After demand​ increases, and supply​ increases, the quantity will be more than 4 million​ boxes, but the price will return to its initial level.

An article in the Wall Street Journal discusses the visual effects​ industry, which is made up of firms that provide visual effects for films and television programs. The article notes​ that: "Blockbusters... often have thousands of visual effects shots. Even dramas and comedies today can include hundreds of​ them." But the article notes that the firms producing the effects have not been very profitable. Some firms have declared​ bankruptcy, and the former general manager of one firm was quoted as​ saying: ​ "A good year for us was a​ 5% return." What dynamics best describe the factors at play in this​ market? Market entry for visual effect companies is relatively

​Easy, so firms can expect to earn zero economic profit in the long run.

Which of the following best explains why firms​ don't maximize revenue rather than profit​? If a firm decided to maximize​ revenue, would it be likely to produce a smaller or a larger quantity than if it were maximizing​ profit? The firm would produce a _______ quantity of output.

At the point where revenue is​ maximized, the difference between total revenue and total cost may not be maximized. Larger

Which demand curve in the graph to the right is associated with the shutdown point for this perfectly competitive​ firm?

D2

Suppose you read the following item in a newspaper​ article, under the headline ​"Price Gouging Alleged in Pencil​ Market": Consumer advocacy groups charged at a press conference yesterday that there is widespread price gouging in the sale of pencils. They released a study showing that whereas the average retail price of pencils was​ $1.00, the average cost of producing pencils was only​ $0.50. "Pencils can be produced without complicated machinery or highly skilled​ workers, so there is no justification for companies charging a price that is twice what it costs them to produce the product. Pencils are too important in the life of every American for us to tolerate this sort of price gouging any​ longer," said George​ Grommet, chief spokesperson for the consumer groups. The consumer groups advocate passage of a law that would allow companies selling pencils to charge a price no more than 20 percent greater than their average cost of production. Which of the following is not likely to happen in the pencil​ market?

Firms will charge a price above marginal cost in the long run.

A student examines the graph to the right and​ argues, ​"I believe that a firm will want to produce at Q1​, not Q2. At Q1​, the distance between price and marginal cost is the greatest.​ Therefore, at Q1​, the firm will be maximizing its​ profits." Is the​ student's argument correct or​ incorrect?

Incorrect. Profits are maximized at the quantity where marginal revenue equals marginal cost.

The late Nobel​ Prize-winning economist George Stigler once​ wrote, "the most common and most important criticism of perfect competition...​ [is] that it is​ unrealistic." Despite the fact that few firms sell identical products in markets where there are no barriers to​ entry, economists believe that the model of perfect competition is important because

It is a benchmark—a market with the maximum possible competition—that economists use to evaluate actual markets that are not perfectly competitive.

The following questions are about​ long-run equilibrium in the market for​ cage-free eggs. As described in the chapter​ opener, the market for cage​-free eggs in 2015 was In the long run in the market for cage​-free ​eggs, we would expect With the stricter​ guidelines, other things​ equal, the market price of​ cage-free eggs would _____ as the minimum​ long-run average cost _____. At the new market​ price, the​ long-run equilibrium quantity will be _____.

Not in equilibrium because farmers who were raising​ cage-free chickens were earning higher profits than farmers who raised chickens using more traditional methods. The equilibrium price to decrease and the equilibrium quantity to​ increase, as more firms enter. Increase; increases; smaller

Which of the following are perfectly competitive markets? Apple Growing

Perfectly Competitive: Yes Number of Firms: Many Type of Product: Identical Ease of Entry: High

Which of the following are perfectly competitive markets? Corn Farming

Perfectly Competitive: Yes Number of Firms: Many Type of Product: Identical Ease of Entry: High

Edward Scahill produces table lamps in the perfectly competitive desk lamp market. The equilibrium price of lamps is ​$60. a. Fill in the blanks in the table for total revenue and marginal​ revenue, as represented by ​(i and ii). ​(Enter your responses as​ integers.) (i​)Total revenue is ​$_______. (​ii) Marginal revenue is $______. b. How many table lamps will Edward produce to maximize​ profit? _____ lamps. c. If next week the equilibrium price of desk lamps drops to​ $30, should Edward shut down?

Picture 10 180 (TR blank space) 60 (MR column) 7 (TR - TC and find the highest one) No because price is greater than minimum AVC.

Assume the top figure on the right shows the cost of production for a representative farmer in the​ organic-farming industry. The bottom figure shows the market for this industry. In this​ example, farmers of organic corn have not experienced an increase in profits because the market price has _______

Picture 13, 14, 15, and 16 Not changed

The figure to the right represents the market for peaches. Assume the market for peaches is perfectly competitive and a​ constant-cost industry. Also assume the industry is initially in​ long-run equilibrium. ​Then, the demand for peaches increases​, as​ shown, from D1 to D2.

Picture 25

Suppose Farmer Smith grows apples. The entire market for apples is shown in the figure below. Assume the market for apples is perfectly competitive.

Picture 27

Suppose that most wheat farms are suffering a loss. Now suppose that a new scientific study shows that eating four slices of whole wheat bread per day is an effective means of weight​ control, lowers blood​ pressure, and reduces the likelihood of heart disease. Assume that this study results in the typical wheat farm earning an economic profit. Use two graphs to illustrate the effect of the release of the​ study: one graph showing the effect on the market for wheat and another graph showing the effect on a representative wheat farm. Be sure your graph for the wheat market shows any shifts in the market demand and supply curve and any changes in the equilibrium market price. Be sure that your graph for the representative farm includes its marginal revenue​ curve, marginal cost​ curve, average total cost​ curve, any change in its demand​ curve, and the area showing its loss before the release of the study and its profit after the release. Assume the top figure on the right shows the cost of production for a representative farm in the wheat industry before the scientific study. The bottom figure shows the market for this industry before the study.

Pictures 6, 7, and 8

Suppose a farmer in Georgia begins to grow peaches. He uses​ $1,000,000 in savings to purchase​ land, he rents equipment for $60,000 a​ year, and he pays workers ​$140,000 in wages. In​ return, he produces 150,000 baskets of peaches per​ year, which sell for ​$3.00 each. Suppose the interest rate on savings is 11 percent and that the farmer could otherwise have earned ​$25,000 as a shoe salesman. What is the​ farmer's economic​ profit? The peach farmer earns economic profit of $_______. What is the​ farmer's accounting​ profit? The peach farmer earns accounting profit of ​$_______.

Question 6

Does the market system result in allocative​ efficiency? In the long​ run, perfect competition

Results in allocative efficiency because firms produce where price equals marginal cost.

Does the market system result in productive​ efficiency? In the long​ run, perfect competition

Results in productive efficiency because firms enter and exit until they break even where price equals minimum average cost.

The financial writer Andrew Tobias has described an incident when he was a student at Harvard Business​ School: Each student in the class was given large amounts of information about a particular firm and asked to determine a pricing strategy for the firm. Most of the students spent hours preparing their answers and came to class carrying many sheets of paper with their calculations. When his professor called on him in class for an​ answer, Tobias​ stated, ​"The case said the XYZ Company was in a very competitive industry . . . and the case said that the company had all the business it could​ handle." Given this​ information, what price do you think Tobias argued the company should​ charge? (Tobias says the class greeted his answer with​ "thunderous applause.")

The market price

Suppose that the laptop computer industry is perfectly competitive and that the firms that assemble laptops do not also make the displays for them. Suppose that the laptop display industry is also perfectly competitive. Suppose that because the demand for laptop displays is currently relatively​ small, firms in the laptop display industry have not been able to take advantage of all the economies of scale in laptop display production. Use this information and the graphs below to answer the following questions. What happens to the price and profit of the individual laptop produced in the short​ run? As production of laptop displays​ increases, firms in the industry can now enjoy economies of scale. In the short​ run, makers of laptop displays will​ what? What will happen in the laptop market in the long​ run? Because the price of laptops falls in the long run as output​ increases, what is true about this​ industry?

They both rise. Be able to earn economic profit. Firms will enter the market. It is a​ decreasing-cost industry.

Suppose the market for cotton is perfectly competitive and that input prices increase as the industry expands. Characterize the​ industry's long-run supply curve. The cotton​ industry's long-run supply curve will be

Upward sloping because the​ long-run average cost of production will be increasing


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