Question 1

If the long-run market supply curve in a perfectly competitive industry is upward sloping, then the industry:

Accepted Answer

A)  is a constant-cost industry. 
B)  is an increasing-cost industry. 
C)  exhibits constant returns to scale. 
D)  exhibits increasing returns to scale. 
E)  is a decreasing-cost industry. 
A)  is a constant-cost industry. 
B)  is an increasing-cost industry. 
C)  exhibits constant returns to scale. 
D)  exhibits increasing returns to scale. 
E)  is a decreasing-cost industry. B

Question 2

Derive the long-run supply curve of a perfectly competitive constant-cost industry. Use graphical analysis.

Accepted Answer

The initial point of equilibrium occurs where demand curve D₁ intersects short-run supply curve S₁, resulting in price P* and quantity Q.

The initial point of equilibrium occurs where demand curve D<sub>1</sub> intersects short-run supply curve S<sub>1</sub>, resulting in price P* and quantity Q. When the demand curve shift outwards, the new equilibrium price in the short run will be higher than the initial equilibrium price (P > P*), output increases to Q', and firms will make positive economic profits. In a competitive market with free entry, new firms will enter the market. Since it is a constant cost industry, entry of new firms does not bid up input prices. Therefore, as new firms enter, the market supply curve shifts outward (to S<sub>2</sub>), industry output increases to Q, and price returns to its original level. (Joining the two equilibrium points generates the horizontal line at P*.) Therefore, for an industry with constant costs, the long-run supply curve is horizontal.

When the demand curve shift outwards, the new equilibrium price in the short run will be higher than the initial equilibrium price (P > P*), output increases to Q', and firms will make positive economic profits. In a competitive market with free entry, new firms will enter the market. Since it is a constant cost industry, entry of new firms does not bid up input prices. Therefore, as new firms enter, the market supply curve shifts outward (to S₂), industry output increases to Q", and price returns to its original level. (Joining the two equilibrium points generates the horizontal line at P*.) Therefore, for an industry with constant costs, the long-run supply curve is horizontal.

Question 3

Everything else remaining unchanged, an increase in demand will lead to:

Accepted Answer

A)  a leftward shift of the supply curve and a consequent fall in price. 
B)  an upward movement along the demand curve. 
C)  a rightward shift of the demand curve. 
D)  an increase in output and a fall in price. 
E)  a downward movement along the demand curve. 
A)  a leftward shift of the supply curve and a consequent fall in price. 
B)  an upward movement along the demand curve. 
C)  a rightward shift of the demand curve. 
D)  an increase in output and a fall in price. 
E)  a downward movement along the demand curve. C

Question 4

What is meant by consumer surplus?

Accepted Answer

A)  It is the net gain that buyers obtain from purchasing a good. 
B)  It is the area enclosed by the demand and supply curves. 
C)  It is the difference between the good's price and its cost per unit. 
D)  It is the maximum monetary amount that a person would be willing to pay for a good. 
E)  It is the total satisfaction from the consumption of a good. 
A)  It is the net gain that buyers obtain from purchasing a good. 
B)  It is the area enclosed by the demand and supply curves. 
C)  It is the difference between the good's price and its cost per unit. 
D)  It is the maximum monetary amount that a person would be willing to pay for a good. 
E)  It is the total satisfaction from the consumption of a good.

Question 5

The following figure shows the domestic demand and supply curves for a good. With free trade, the price of the good in the domestic market is PS1U1B13S1U1B0. The government introduces a 5% tariff in the market which raises the domestic price to PS1U1B12S1U1B0.
Figure 7-1
  
-Refer to Figure 7-1. With the imposition of the tariff, the deadweight loss in the market is equal to:

Accepted Answer

A)  the area of FGH. 
B)  the area of JGL + HMK. 
C)  the area of HMK. 
D)  the area of FJK. 
E)  the area of JABL + MKED. 
A)  the area of FGH. 
B)  the area of JGL + HMK. 
C)  the area of HMK. 
D)  the area of FJK. 
E)  the area of JABL + MKED.

Question 6

How can supply and demand analysis be used to measure consumer surplus? How does consumer surplus change if the market price falls?

Accepted Answer

The following figure shows the consumer

Question 7

Derive the short-run supply curve of a firm under perfect competition.

Accepted Answer

A firm maximizes profit by producing at

Question 8

A firm has the following cost function: C = 30 - 14Q + Q2. Derive the firm's supply curve from the total cost function.

Accepted Answer

The firm's supply curve is the portion o

Question 9

Alex is the manager of a division of a paper firm that produces copier paper and sells it on the wholesale market. His firm's output represents about 1.5% of total copier paper sales. The wholesale price of copier paper is $3.95 per standard package. The firm's engineers report that, at projected volumes, labor costs are $1.00 per package, material costs are $2.00 per package, and other average fixed costs are about $.75 per package. What price should the firm charge for its copier paper?

Accepted Answer

Alex's firm is as close to a perfectly c

Question 10

The following figure shows the domestic demand and supply curves for a good. With free trade, the price of the good in the domestic market is PS1U1B13S1U1B0. The government introduces a 5% tariff in the market which raises the domestic price to PS1U1B12S1U1B0.
Figure 7-1
  
-Refer to Figure 7-1. If the government substitutes the tariff for a quota that raises the price in the domestic price to P2, the deadweight loss in the market would be equal to:

Accepted Answer

A)  the area of GHLM. 
B)  the area of GHKJ. 
C)  the area of HMK. 
D)  the area of JGL. 
E)  the area of JGL + HMK. 
A)  the area of GHLM. 
B)  the area of GHKJ. 
C)  the area of HMK. 
D)  the area of JGL. 
E)  the area of JGL + HMK.

Question 11

Demand for a good is given by: QD = 100 - P and supply by QS = .5P - 20, where P is the market price of the good. In equilibrium, price and output under perfect competition will be:

Accepted Answer

A)  $60 and 10 units respectively. 
B)  $80 and 20 units respectively. 
C)  $70 and 30 units respectively. 
D)  $100 and 30 units respectively. 
E)  $120 and 35 units respectively. 
A)  $60 and 10 units respectively. 
B)  $80 and 20 units respectively. 
C)  $70 and 30 units respectively. 
D)  $100 and 30 units respectively. 
E)  $120 and 35 units respectively.

Question 12

In order to maximize profits, a perfectly competitive firm will continue producing until:

Accepted Answer

A)  it utilizes its full production capacity. 
B)  the marginal cost equals the market price. 
C)  the average cost is minimized. 
D)  its total sales revenue is maximized. 
E)  the profit per-unit is at its highest possible point. 
A)  it utilizes its full production capacity. 
B)  the marginal cost equals the market price. 
C)  the average cost is minimized. 
D)  its total sales revenue is maximized. 
E)  the profit per-unit is at its highest possible point.

Question 13

With free trade, the market for a particular good or service is in equilibrium when:

Accepted Answer

A)  domestic supply is at its maximum possible level. 
B)  there are no exports to the world market. 
C)  imports into the domestic market are zero. 
D)  the price in the world market is equal to the price in the domestic market. 
E)  the domestic demand for the good equals the domestic supply of the good. 
A)  domestic supply is at its maximum possible level. 
B)  there are no exports to the world market. 
C)  imports into the domestic market are zero. 
D)  the price in the world market is equal to the price in the domestic market. 
E)  the domestic demand for the good equals the domestic supply of the good.

Question 14

The following figure shows the domestic demand and supply curves for a good. With free trade, the price of the good in the domestic market is PS1U1B13S1U1B0. The government introduces a 5% tariff in the market which raises the domestic price to PS1U1B12S1U1B0.
Figure 7-1
  
-Refer to Figure 7-1. When trade is not restricted, the level of imports to the domestic market is _____.

Accepted Answer

A)  CD 
B)  AE 
C)  0 
D)  BD 
E)  AC 
A)  CD 
B)  AE 
C)  0 
D)  BD 
E)  AC

Question 15

Discuss why many agricultural industries in the United States are primary examples of perfectly competitive markets.

Accepted Answer

Many actual agricultural markets possess

Question 16

Suppose a severe freeze damages the Florida orange crop. Everything else remaining unchanged, which of the following is most likely to be true?

Accepted Answer

A)  Because of the shortage of oranges, consumers will reduce their demand in order to economize. 
B)  The supply curve for oranges will shift to the right. 
C)  Both the output and the price of oranges will decrease. 
D)  Both the supply curve and the demand curve for oranges will shift to the left. 
E)  The output of oranges will fall and the price will increase. 
A)  Because of the shortage of oranges, consumers will reduce their demand in order to economize. 
B)  The supply curve for oranges will shift to the right. 
C)  Both the output and the price of oranges will decrease. 
D)  Both the supply curve and the demand curve for oranges will shift to the left. 
E)  The output of oranges will fall and the price will increase.

Question 17

The height of an individual demand curve at each level of output shows:

Accepted Answer

A)  the marginal cost of producing the good. 
B)  the marginal benefit from consuming an extra unit of the good. 
C)  the value of consumer surplus. 
D)  the value of producer surplus. 
E)  the revenue earned by the firm from an additional unit consumed. 
A)  the marginal cost of producing the good. 
B)  the marginal benefit from consuming an extra unit of the good. 
C)  the value of consumer surplus. 
D)  the value of producer surplus. 
E)  the revenue earned by the firm from an additional unit consumed.

Question 18

Explain why perfectly competitive firms cannot earn positive economic profits in the long run.

Accepted Answer

In the model of perfect competition, the

Question 19

Is an efficient market allocation fair? Explain why or why not.

Accepted Answer

Efficiency and equity are separate notio

Question 20

The marginal cost of a firm under perfect competition is given by the equation MC = 2QF − 20. The market price is $50 per unit. Determine the firm's profit-maximizing level of output. Write down the equation for the firm's supply curve.

Accepted Answer

The firm maximizes profit by s

If the long-run market supply curve in a perfectly competitive industry is upward sloping, then the industry:

Derive the long-run supply curve of a perfectly competitive constant-cost industry. Use graphical analysis.

Everything else remaining unchanged, an increase in demand will lead to:

What is meant by consumer surplus?

How can supply and demand analysis be used to measure consumer surplus? How does consumer surplus change if the market price falls?

Derive the short-run supply curve of a firm under perfect competition.

A firm has the following cost function: C = 30 - 14Q + Q². Derive the firm's supply curve from the total cost function.

Demand for a good is given by: Q_D = 100 - P and supply by Q_S = .5P - 20, where P is the market price of the good. In equilibrium, price and output under perfect competition will be:

In order to maximize profits, a perfectly competitive firm will continue producing until:

With free trade, the market for a particular good or service is in equilibrium when:

Discuss why many agricultural industries in the United States are primary examples of perfectly competitive markets.

Suppose a severe freeze damages the Florida orange crop. Everything else remaining unchanged, which of the following is most likely to be true?

The height of an individual demand curve at each level of output shows:

Explain why perfectly competitive firms cannot earn positive economic profits in the long run.

Is an efficient market allocation fair? Explain why or why not.

The marginal cost of a firm under perfect competition is given by the equation MC = 2Q_F − 20. The market price is $50 per unit. Determine the firm's profit-maximizing level of output. Write down the equation for the firm's supply curve.

Introduction to Economic Decision Making

Optimal Decisions Using Marginal Analysis

Demand Analysis and Optimal Pricing

Estimating and Forecasting Demand

Production

Cost Analysis

Monopoly

Oligopoly

Game Theory and Competitive Strategy

Regulation, Public Goods, and Benefit-Cost Analysis

Decision Making Under Uncertainty

The Value of Information

Asymmetric Information and Organizational Design

Bargaining and Negotiation

Linear Programming

Auctions and Competitive Bidding Available Online

Filters

Exam 7: Perfect Competition

If the long-run market supply curve in a perfectly competitive industry is upward sloping, then the industry:

Derive the long-run supply curve of a perfectly competitive constant-cost industry. Use graphical analysis.

Everything else remaining unchanged, an increase in demand will lead to:

What is meant by consumer surplus?

How can supply and demand analysis be used to measure consumer surplus? How does consumer surplus change if the market price falls?

Derive the short-run supply curve of a firm under perfect competition.

A firm has the following cost function: C = 30 - 14Q + Q2. Derive the firm's supply curve from the total cost function.

Demand for a good is given by: QD = 100 - P and supply by QS = .5P - 20, where P is the market price of the good. In equilibrium, price and output under perfect competition will be:

In order to maximize profits, a perfectly competitive firm will continue producing until:

With free trade, the market for a particular good or service is in equilibrium when:

Discuss why many agricultural industries in the United States are primary examples of perfectly competitive markets.

Suppose a severe freeze damages the Florida orange crop. Everything else remaining unchanged, which of the following is most likely to be true?

The height of an individual demand curve at each level of output shows:

Explain why perfectly competitive firms cannot earn positive economic profits in the long run.

Is an efficient market allocation fair? Explain why or why not.

The marginal cost of a firm under perfect competition is given by the equation MC = 2QF − 20. The market price is $50 per unit. Determine the firm's profit-maximizing level of output. Write down the equation for the firm's supply curve.

Introduction to Economic Decision Making

Optimal Decisions Using Marginal Analysis

Demand Analysis and Optimal Pricing

Estimating and Forecasting Demand

Production

Cost Analysis

Monopoly

Oligopoly

Game Theory and Competitive Strategy

Regulation, Public Goods, and Benefit-Cost Analysis

Decision Making Under Uncertainty

The Value of Information

Asymmetric Information and Organizational Design

Bargaining and Negotiation

Linear Programming

Auctions and Competitive Bidding Available Online

Filters

A firm has the following cost function: C = 30 - 14Q + Q². Derive the firm's supply curve from the total cost function.

Demand for a good is given by: Q_D = 100 - P and supply by Q_S = .5P - 20, where P is the market price of the good. In equilibrium, price and output under perfect competition will be:

The marginal cost of a firm under perfect competition is given by the equation MC = 2Q_F − 20. The market price is $50 per unit. Determine the firm's profit-maximizing level of output. Write down the equation for the firm's supply curve.