CA Chap 14 -03

1. The short-run market supply curve in a perfectly competitive industry

P1

Q1 Quantity Quantity

2. Refer to Figure 14-3. If the figure in panel (a) reflects the long-run equilibrium of a profit-
maximizing firm in a competitive market, the figure in panel (b) most likely reflects
a. perfectly inelastic long-run market supply.
b. perfectly elastic long-run market supply.
c. the entry of firms into the industry when some resources used in production are
available only in limited quantities.
d. the fact that zero profits cannot be sustained in the long run.
3. In a competitive market with identical firms,
a. an increase in demand in the short run will result in a new price above the
minimum of average total cost, allowing firms to earn a positive economic profit in
both the short run and the long run.
b. firms cannot earn positive economic profit in either the short run or long run.
c. firms can earn positive economic profit in the long run if the long-run market
supply curve is upward sloping.
d. free entry and exit into the market requires that firms earn zero economic profit in
the long run even though they may be able to earn positive economic profit in the
short run.
4. Suppose a competitive market is comprised of firms that face identical cost curves. The
firms experience an increase in demand that results in positive profits for the firms. Which
of the following events are then most likely to occur?
(i) New firms will enter the market.
(ii) In the short run, price will rise; in the long run, price will rise further.
(iii) In the long run, all firms will be producing at their efficient scale.
a (i) and (ii) only.
.
b (i) and (iii) only.
.
c (ii) and (iii) only.
.
d (i), (ii) and (iii).
.
5. If occupational safety laws were changed so that firms no longer had to take expensive steps
to meet regulatory requirements, we would expect that
a. the demand for products in this industry would increase.
b. the market price of products in this industry would decrease in the short run but not
in the long run.
c. the firms in the industry would make a long-run economic profit.
d. competition would force producers to pass the lower production costs on to
consumers in the long run.
6. If there is an increase in market demand in a perfectly competitive market, then in the short
run prices will
a. rise.
b. remain unchanged at the minimum of average total cost.
c. fall.
d. remain unchanged at the minimum of marginal cost.
7. When a profit-maximizing firm in a competitive market has zero economic profit,
accounting profit
a. is negative.
b. is at least zero.
c. is also zero.
d. could be positive, negative or zero.
8. In calculating accounting profit, accountants typically don't include
a. long-run costs.
b. sunk costs.
c. explicit costs of production.
d. opportunity costs that do not involve an outflow of money.
9. In a perfectly competitive market, the process of entry and exit will end when
(i) accounting profits are zero.
(ii) economic profits are zero.
(iii) price equals minimum marginal cost.
(iv) price equals minimum average total cost.
a. (i) and (ii) only
b (ii) and (iii) only
.
c. (ii) and (iv) only
d (i), (ii), (iii), and (iv)
.
Figure 14-4
Suppose a firm in a competitive industry has the following cost curves:
Price
10 MC
9 ATC
8 AVC
7

6 P1
5
P2
4
P3
3

2 P4
1

1 2 3 4 5 6 7 8 Quantity

10. Refer to Figure 14-4. If the price is P1 in the short run, what will happen in the long run?
a. Nothing. The price is consistent with zero economic profits, so there is no
incentive for firms to enter or exit the industry.
b. Individual firms will earn positive economic profits in the short run, which will
entice other firms to enter the industry.
c. Individual firms will earn negative economic profits in the short run, which will
cause some firms to exit the industry.
d. Because the price is below the firm’s average variable costs, the firms will shut
down.
11. Refer to Figure 14-4. If the price is P2 in the short run, what will happen in the long run?
a. Nothing. The price is consistent with zero economic profits, so there is no
incentive for firms to enter or exit the industry.
b. Individual firms will earn positive economic profits in the short run, which will
entice other firms to enter the industry.
c. Individual firms will earn negative economic profits in the short run, which will
cause some firms to exit the industry.
d. Because the price is below the firm’s average variable costs, the firms will shut
down.
12. If all existing firms and all potential firms have the same cost curves, there are no inputs in
limited quantities, and the market is characterized by free entry and exit, then the long-run
market supply curve
a. is horizontal and equal to the minimum of long-run marginal cost for each firm.
b. must slope downward.
c. must slope upward.
d. is horizontal and equal to the minimum of long-run average cost for each firm.
Figure 14-5
Price Price
(a) MC (b) S0 S1

ATC
B
P2 P2
A C
P1 P1
D
P0 P0

D1
D0

Q1 Q2 Quantity QA QBQD QC Quantity

13. Refer to Figure 14-5. Assume that the market starts in equilibrium at point A in panel (b)
and that panel (a) illustrates the cost curves facing individual firms. Suppose that demand
increases from D0 to D1. Which of the following statements is correct?
a. Points A, B, and C represent both short-run and long-run equilibria.
b. Points A, B, C, and D represent short-run equilibria.
c. Points A and B represent long-run equilibria.
d. Points A and C represent long-run equilibria.