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1 1 of 18 10/19/ :51 PM Which of the following is true about a competitive market supply curve? It is horizontal. It is downward-sloping to the right. It is the sum of the marginal cost curves of all firms. It is vertical. The market supply curve is the sum of the marginal cost curves, which are usually upward-sloping due to diminishing marginal returns, of all the firms. Therefore, market supply curve in a perfectly competitive firm is usually upwardsloping. Which of the following is characteristic of a perfectly competitive market? A small number of firms. Exit of small firms when profits are high for large firms. Zero economic profit in the long run. Marginal revenue lower than price for each firm. A perfectly competitive industry has several distinguishing characteristics, including many firms, identical products, and low entry barriers. Because of the low entry barriers, perfectly competitive firms will earn zero economic profit in the long run.

2 2 of 18 10/19/ :51 PM For a competitive market in the long run, Economic losses induce firms to shut down. Economic profits induce firms to enter until profits are normal. Accounting profit is zero. Economic profit is positive. If economic profits exist in an industry, more firms will want to enter it. As they do, the market supply curve will shift to the right and cause the market price to drop until profits are normal. If economic profits are earned in a competitive market, then over time Additional firms will enter the market. The market supply curve will shift to the left. Equilibrium price will rise as more firms enter. Normal profit will fall to zero as more firms enter. If economic profits exist in an industry, more firms will want to enter it. As they do, the market supply curve will shift to the right and cause the market price to drop until profits are normal. If long-run economic losses are being experienced in a competitive market, More firms will enter the market. The market supply curve will shift to the right. Equilibrium price will rise as firms exit. Normal profit will fall to zero as firms enter. If economic losses exist in an industry, firms will want to exit. As they do, the market supply curve will shift to the left and cause the market price to increase until profits are normal.

3 3 of 18 10/19/ :51 PM In a competitive market where firms are earning economic losses, which of the following should be expected as the industry moves to long-run equilibrium, ceteris paribus? A higher price and more firms. A higher price and fewer firms. A lower price and more firms. A lower price and fewer firms. If economic losses exist in an industry, firms will want to exit. As they do, the market supply curve will shift to the left and cause the market price to increase until profits are normal. The exit of firms from a market, ceteris paribus, Shifts the market supply curve to the right. Has no effect on the economic losses of remaining firms in the market. Increases the equilibrium price in the market. Shifts the market demand curve to the left. If economic losses exist in an industry, firms will want to exit. As they do, the market supply curve will shift to the left and cause the market price to increase until profits are normal. Examples of barriers to entry include Price taking. Patents. Standardized products. Economic profits. Barriers to entry include patents, economies of scale, ownership of key resources, and government regulation.

4 4 of 18 10/19/ :51 PM Which of the following is not a barrier to entry? Patents. Well-established brand loyalty. Control of distribution outlets. Perfect information. Barriers to entry include patents, economies of scale, ownership of key resources, and government regulation. Perfectly competitive firms cannot individually affect market price because There is an infinite demand for their goods. Demand is perfectly inelastic for their goods. There are many firms, none of which has a significant share of total output. The government exercises control over the market power of competitive firms. A firm that has market power can control the market price for the good it sells, unlike a perfectly competitive firm that risks losing all of its customers, who will shop elsewhere, if the firm increases the price of its product. Which of the following is characteristic of a perfectly competitive market? Long-run economic profit. High barriers to entry. Identical products. A small number of firms. A perfectly competitive industry has several distinguishing characteristics, including many firms, identical products, and low entry barriers. Because of the low entry barriers, perfectly competitive firms will earn zero economic profit in the long run.

5 5 of 18 10/19/ :51 PM Which of the following is not a characteristic of a perfectly competitive market? Zero economic profit in the long run. Perfect information. Homogeneous products. High barriers. A perfectly competitive industry has several distinguishing characteristics, including many firms, identical products, and low entry barriers. Because of the low entry barriers, perfectly competitive firms will earn zero economic profit in the long run. If the products of two firms are homogeneous, then they Are perfect substitutes. Differ from each other. Must be used together. Are costless to produce. If products are homogeneous, then one firm's product is the same as any other firm's product and is interchangeable. The behavior expected in a competitive market includes Very little entry and exit. Marginal cost pricing. Aggressive behavior among competitors to control prices. Little technological growth. Profit maximization induces the competitive firm to produce at that rate of output where marginal costs equal price. The profit motive encourages entry and exit as well as technology development. Perfectly competitive firms are "price takers."

6 6 of 18 10/19/ :51 PM In a perfectly competitive industry, economic profit: Can persist in the long run because of barriers to entry. Can persist in the long run because of homogeneous products. Will approach zero in the long run as prices are driven to zero. Will approach zero in the long run as prices are driven to the level of average production costs. If economic profits exist in an industry, more firms will want to enter it. As they do, the market supply curve will shift to the right and cause the market price to drop until profits are normal. In a competitive market, Buyers don't have market power but sellers do. Sellers don't have market power but buyers do. Neither buyers nor sellers have market power. Buyers and sellers both have market power. A perfectly competitive industry has several distinguishing characteristics, including many buyers and sellers, identical products, and low entry barriers. Because of the many buyers and sellers, neither buyers nor sellers will have market power. Suppose a perfectly competitive firm is experiencing zero economic profits. In an effort to increase profits, the firm decides to initiate an advertising campaign for its product. The most likely short-run result of this campaign, ceteris paribus, would be Economic losses for the firm. The ability to sell more at the existing market price. The ability to sell more at a lower price. The ability to sell more at a higher price. A perfectly competitive industry has several distinguishing characteristics, including many firms, identical products, and low entry barriers. Because the products are identical, it is not necessary or even beneficial to advertise.

7 7 of 18 10/19/ :51 PM Profit per unit is maximized when the firm produces the output where The ATC is minimized. MC equals MR. The MC is minimized. Demand equals MC. The profit per unit (price minus ATC) is at its highest at the ATC minimum point. Which of the following is consistent with long-run equilibrium for a perfectly competitive market? Average total costs of production are maximized. Economic profits are positive. Maximum technical efficiency is achieved. Average variable costs of production are maximized. Competition drives costs down to their bare minimum the hallmark of economic efficiency. This is illustrated by the tendency of perfectly competitive firms' prices to be driven down to the level of minimum average costs. Learning Objective: Why long-run economic profits approach zero in competitive In long-run perfectly competitive equilibrium, marginal cost Is greater than ATC. Is less than ATC. Equals the minimum of the ATC. Equals the minimum of the AVC. Competition drives costs down to their bare minimum the hallmark of economic efficiency. This is illustrated by the tendency of perfectly competitive firms' prices to be driven down to the level of minimum average costs. Learning Objective: Why long-run economic profits approach zero in competitive

8 8 of 18 10/19/ :51 PM If price is below the long-run competitive equilibrium level, there will be Greater demand. Positive economic profits. Greater output. Exit of firms from the market. If economic losses exist in an industry (P < ATC), firms will want to exit. As they do, the market supply curve will shift to the left and cause the market price to increase until profits are normal. In a competitive market, if the market price is equal to the minimum point of the firm's ATC curve, the firm may seek to earn economic profits by Producing at the rate of output where price equals demand. Decreasing production costs through technological improvements. Decreasing price. Increasing price. When the market is at long-run equilibrium, the quest for profits encourages producers to discover cheaper ways to manufacture their products. This results in lower costs and encourages further increases in the rate of output.

9 9 of 18 10/19/ :51 PM Refer to Figure 23.1 for a perfectly competitive firm. This firm should shut down in the short run if the market price is below $5. $10. $15. $20. A firm should shut down only if the losses from continuing production exceed fixed costs. This happens when price is less than the minimum average variable cost ($5).

10 10 of 18 10/19/ :51 PM Refer to Figure 23.2 for a perfectly competitive firm. This firm will maximize profits by producing the level of output that corresponds to point A. B. C. D. A competitive firm maximizes total profit at the output rate where MR is equal to MC point C. Learning Objective: Why long-run economic profits approach zero in competitive

11 11 of 18 10/19/ :51 PM Which of the following is a consequence of competition? An unrelenting squeeze on prices and profit. Positive economic profit in the long run. Elimination of the most efficient firms. Price-gouging behavior. The quest for profits causes a squeeze on prices and profits. This unrelenting competition has been observed in the computer market and is a fundamental characteristic of the competitive process. Which of the following is least likely to occur during the long run in a perfectly competitive market experiencing economic profits? A rightward shift in the market supply curve. An increase in the market quantity demanded. An increase in marginal revenue. A decline in the ATC and MC curves. High profits attract new suppliers, and the market supply curve shifts to the right. Prices decrease, equilibrium quantity increases, and profits approach zero. Producers will experience great pressure to keep ahead of the profit squeeze by reducing costs, a pressure that frequently results in product and technological innovation. None of these actions result in an increase in marginal revenue. Learning Objective: Why long-run economic profits approach zero in competitive Which characteristic of competitive markets permits society to answer the WHAT to produce question efficiently? Marginal cost pricing. Average cost pricing. Minimum cost pricing. Total cost pricing. The marginal cost pricing characteristic of competitive markets permits society to answer the WHAT to produce question efficiently. The amount consumers are willing to pay for a good (its price) equals its opportunity cost (marginal cost).

12 12 of 18 10/19/ :51 PM Marginal cost pricing in competitive markets results in all but which one of the following? An efficient mix of goods and services being produced. Output being produced where price equals the opportunity cost of the last unit being produced. The information necessary for consumers to make rational choices between alternative goods and services. Maximization of consumer utility. The marginal cost pricing characteristic of competitive markets permits society to answer the WHAT to produce question efficiently. The amount consumers are willing to pay for a good (its price) equals its opportunity cost (marginal cost), but that output doesn't necessarily maximize utility or satisfaction. Learning Objective: How society benefits from market Bib's Soccer Ball Company produces 800 soccer balls per week. If the firm used marginal cost pricing to determine soccer ball output, it would produce 600 soccer balls. Consumers do not receive the most desirable quantity of soccer balls from Bib's because Economic losses are occurring. The firm must be earning higher than normal economic profits. The cost of producing the additional 200 soccer balls is greater than the amount that consumers are willing to pay for the additional soccer balls. The cost of producing the additional 200 soccer balls is less than the amount that consumers are willing to pay for the additional soccer balls. The marginal cost pricing characteristic of competitive markets permits society to answer the WHAT to produce question efficiently. The amount consumers are willing to pay for a good (its price) equals its opportunity cost (marginal cost). But this is not true when a firm produces quantities at which MC is greater than the price. Learning Objective: How society benefits from market

13 13 of 18 10/19/ :51 PM In Figure 23.3, diagram "a" presents the cost curves that are relevant to a firm's production decision, and diagram "b" shows the market demand and supply curves for the market. Use both diagrams to answer the following question: In Figure 23.3, at a price of p 3 in the long run Firms will enter the market. Economic profits equal zero. Firms will exit the market. P = ATC. Economic profits attract new suppliers, and the market supply curve shifts to the right. Prices decrease, equilibrium quantity increases, and profits approaches zero.

14 14 of 18 10/19/ :51 PM Refer to Figure 23.4 for a perfectly competitive market and firm. Which of the following is most likely to occur, ceteris paribus? The firm will exit in the long run. The firm will increase output. The firm will shut down in the short run. The firm will raise its price. Currently the firm is experiencing economic losses (P < ATC); the firm will exit the market in the long run.

15 15 of 18 10/19/ :51 PM Refer to Figure In the long run, which of the following would not be expected? A decrease in market supply. An increase in total revenue for the remaining firms. An increase in output for the remaining firms. A decrease in MR for the remaining firms. Currently firms are experiencing economic losses (P < ATC), which will cause some firms to exit the market in the long run. This causes a decrease in the market supply curve and an increase in market price. When price increases, MR for the remaining firms will increase.

16 16 of 18 10/19/ :51 PM Refer to Figure 23.5 for a perfectly competitive firm. Given the current market price of $200, we expect to see Firms exit from the industry, driving up the market price. Firms exit from the industry, driving down the market price. No change in the number of firms in the industry and no change in the market price. Firms enter the industry, driving down the market price. If the market price is $200, the price will be equal to the firm's ATC (minimum point). The firm will not incur economic losses or economic profits. Therefore, no incentive exists for entry or exit.

17 17 of 18 10/19/ :51 PM Refer to Figure 23.5 for a perfectly competitive firm. Which of the following is not true for this firm at a price of $200? The firm is using the fewest resources possible to produce each unit of output. The firm is practicing marginal cost pricing. The price is a reflection of the highest-valued good that could have been produced with the resources the firm used for the last unit it produced. The firm should leave this market in an effort to earn economic profits. The firm should not leave this market although economic profit is zero; there is still a provision, at that point, for normal profit.

18 18 of 18 10/19/ :51 PM Refer to Figure 23.5 for a perfectly competitive firm. If more efficient production techniques were developed in this market, which of the following changes would we expect to occur, ceteris paribus? The ATC, MC, and market price would all decrease. The ATC alone would decrease. The ATC, MC, and market price would all increase. The ATC alone would increase. Advances in technological or managerial knowledge and human or physical capital increase our productive capability and therefore cause the MC and the ATC curves to decrease.

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