• November 2nd, 2018

10 questions on microeconomics

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1. The market demand curve for a good or service produced by an industry of purely competitive firms is (refers to direction of slope), whereas the demand curve for a good or service produced by any particular firm in that industry is . That’s because there are many in that industry producing a goods or services that are (i.e., indistinguishable from one another). Under such conditions, the only factor that would determine from whom a customer would buy the product would be its . As a result, each firm within a purely competitive industry is a price — that is, has no ability to control the price it charges. If a particular firm tried to charge a price that was once cent higher than the market price, it would, hypothetically, sell (enter number from Word Bank that corresponds with the answer, not actual amount) units of output.
14 points
1. If the market price (or its average revenue) were greater than the firms’ , that firm would be making economic . This would cause other firms to the industry because in a purely competitive industry there are no restricting the mobility of resources. As this occurred, the supply of the product would and thus the price would .
12 points
1. On the other hand, if the market price (or average revenue) were below the firms’ , they would experience an . This might cause any particular firm to the industry. This would certainly happen if the product’s price was less than . However, if the product’s price were less than ATC but greater than , the entrepreneur would , despite the fact that he is taking an . That’s because if the firm were to under those circumstances, his losses would be than they would be if he continued producing.
18 points
1. Refer to Graph 1 on the Resource Sheet. The current demand curve, D(1), is also the firm’s curve and curve. Given this demand for this firm’s product, the firm will charge a price of (P1-3 — enter number from Word Bank, do not enter letter ) and will produce (a-e — enter number from Word Bank, do not enter letter) units of output. That’s because it is profitable to produce all products for which the exceeds the . The firm will stop producing when the former no long exceeds the latter — that is, when the two are . As you can see by the difference between AR and ATC, given this price/quantity combination, the firm is earning .
16 points
1. , in a perfectly industry, are not sustainable in the long run. That’s because other firms are free to the industry. As they do, the supply of the product will causing the price of the product (and the demand curve) to . If the price falls to something just above P2 on the graph, the firm will still be making and other firms will continue to the industry, causing both the product and the demand curve for the product to continue to .
18 points
1. If, on the other hand, the entry by other firms into the caused the product price to fall somewhere between P2 and P3, the firm would now be experiencing . With the product price within that range, firms would because P> . That’s because even if the firm , it would still incur obligations, which do not expire when a firm stops producing. As long as marginal revenue was taking a bite out of fixed costs because it was covering , the firm will not . It certainly would, however if the product price fell to (P1-3 — enter number from Word Bank, do not enter letter ) or below.
18 points
1. Eventually, however, the fixed costs obligations of some firms will expire and they will take this opportunity to the industry. When they do, supply will go down, price will go up, and in equilibrium, the firm will be making a .
4 points
1. In pefectly competitive markets, productive (or technical) efficiency is achieved:

A. When firms are in equilibrium, they produce at the lowest average (or per unit) cost.

B. When firms are in equilibrium, P = MC.

C. When firms are in equilibrium, there is no entry of firms into (or exit of firms from) the industry.

D. When firms are in equilibrium, firms are earning normal profits.
1 points
1. The perfectly competitive industry achieves “allocative efficiency” because:

P=MC at equilibrium

Firms produce at the lowest ATC at equilibrium

There is no entry or exit of firms at equilibrium.

Economic profits are zero at equilibrium.
1 points
1. Which of the following industries comes closest to being purely competitive?

A. Commercial airlines

B. Agriculture

C. Steal smelting and manufacturing

D. Retail clothing

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