ECO231 Chapter 11 HW

Profits encourage entry into purely competitive industries and losses encourage exit from purely competitive industries because

The entry and exit of firms in a purely competitive industry help to improve resource allocation because

In the long run in a purely competitive industry,

a. The equality of MR and MC is essential for profit maximization in all market structures because if b. Price can be substituted for marginal revenue in the MR = MC rule when an industry is purely competitive because c. In long-run equilibrium, P = minimum ATC = MC. The equality of P and minimum ATC means the firm is achieving d. The equality of P and MC means the firm is achieving

According to the basic model of pure competition, in the long run all firms in a purely competitive industry will earn normal profits. If all firms earn only a normal profit in the long run, why would any firms bother to develop new products or lower-cost production methods?

Consider the following statement: "Ninety percent of new products fail within two years—so you shouldn't be so eager to innovate." This statement is

Suppose that the pen-making industry is perfectly competitive. Also suppose that all current firms and any potential firms that might enter the industry have identical cost curves, with minimum ATC = $1.25 per pen. If the market equilibrium price of pens is currently $1.50, what would you expect the equilibrium price to be in the long run?

Suppose that as the output of mobile phones increases, the cost of touch screens and other component parts decreases. If the mobile phone industry is purely competitive, we would expect the long-run supply curve for mobile phones to be:

Using diagrams for both the industry and a representative firm, illustrate competitive long-run equilibrium. Assume constant costs. Given the change in demand shown by the left diagram, illustrate how this change in demand affects the representative firm. a. Given this change in demand, the representative firm will produce (Click to select) output at a (Click to select) price. b. Long-run equilibrium will be restored by (Click to select) shifting (Click to select) until it is equal to the minimum ATC. In the long run, market (industry) price will (Click to select).

When discussing pure competition, the term long run refers to a period of time long enough to allow:

Suppose that purely competitive firms producing cashews discover that P exceeds MC. a. Is their combined output of cashews too little, too much, or just right to achieve allocative efficiency? b. In the long run, what will happen to the supply of cashews and the price of cashews? c. Use a supply-and-demand diagram to show how that response will change the combined amount of consumer surplus and producer surplus in the market for cashews.

A firm in a purely competitive industry has a typical cost structure. The normal rate of profit in the economy is 6 percent. This firm is earning $5.50 on every $50 invested by its founders. a. What is its percentage rate of return? b. Is the firm earning an economic profit? If so, how large? c. Will this industry see entry or exit? d. What will be the rate of return earned by firms in this industry once the industry reaches long-run equilibrium?