Chapter 10

Question 1

Profit maximization in the long run (3)

Answer 1

• easy entry and exit
• identical costs
• constant-cost industry

Question 2

LR Perfect Competition easy entry and exit

Answer 2

opening or closing a current firm in an industry has no roadblocks

Question 3

LR Perfectly Competition- Identical Cost

Answer 3

All firms in the industry have identical costs

Question 4

LR Perfectly Competitive-Constant Cost Industry

Answer 4

entry and exit do not affect resource price or shift ATC or MC curve of individual firms

Question 5

At LR Eqbm Firms earn a _______profit

Answer 5

normal profit

Question 6

Entry of firms in Long Run eliminates___ in the SR and how

Answer 6

profit
frims enter causing the MC (supply curve) of the market to shift right, increase in supply, causing price to fall back to break even

Question 7

Exit of firms in the Long Run eliminates____in the SR and how

Answer 7

losses
firms exit so MC (supply curve) of market to shift left, decrease in supply and resources, increasing the overall price back to break even

Question 8

Break Even Point

Answer 8

Economic Profit is Zero

Question 9

Perfectly Comp market Making profit in SR causing entry of firms in LR explain

Answer 9

Market Demand of Consumers shift leading to a higher price on the supply curve, firm takes to price and is now making profit in SR as P>ATC. In LR firms notice profit and enter the industry market supply now increase by shifting right the new eqbm price is now the original price as before the original demand shift, firms take new price and now P=ATC so economic profit is zero. Back at eqbm price just with higher quantity and more total firms in industry

Question 10

Perfectly Comp Market Making losses in SR causing exit of Firm in LR explain

Answer 10

Market Demand of Consumers shift leading to a lower price on the supply curve, firm takes price and is now making losses in SR as P < ATC. In LR firms notice losses and exit the industry market supply now decrease by shifting left the new eqbm price is now the original price as before the original demand shift, firms take new price and now P = ATC so economic profit is zero. Back at eqbm price just with lower quantity and less total firms in industry

Question 11

If market P < ATC (From no demand shift)

Answer 11

then in SR creates economic losses, causing firms to leave in LR. This decreases ATC and Supply and P=ATC in LR to be at break even

Question 12

if market P > ATC (from no demand shift)

Answer 12

then in SR creates economic profit, causing firms to enter in the LR. This increase supply increasing ATC and price is brought down to minimum ATC in the long run

Question 13

Long Run Eqbm of perfectly comp market characteristic (2)

Answer 13

• no economic profit so firms earn normal profit
• no tendency for firms to leave or enter as their accounting profit is equal to that the owner of firm could expect to receive in another industry

Question 14

Long Run Market Supply Curves why does it change (2)

Answer 14

• changes when the number of firms in the industry change,

- changes when cost of individual firms in industry changes

Question 15

1. LR Supply for a Constant Cost Industry

2. will it shift ATC or MC curve?

Answer 15

• entry or exit of firms does not affect LRATC, constant resource prices
• does not shift LRATC or MC curve

Question 16

compare industry demand for factors of production with demand for resources in a constant cost LR Supply

Answer 16

• industries demand for factors of production is small in relation to total demand of resources

Question 17

LR supply for an increasing cost industry (2)

Answer 17

• entry of firms increase LRATC, so increases cost of all firms in the industry
• more firms more cost, less firms less cost

Question 18

Price associated of product for a increasing cost industry

Answer 18

price will be associated based on number of firms, more firms=more cost (shift ATC and MC) so we need higher price to get to long run eqbm

Question 19

LR supply for decreasing cost industry

Answer 19

entry decreases LRATC, so decreases cost for all firms in the industry
more firms attract more people so increase efficiency

Question 20

Price associated of product for a decreasing cost industry

Answer 20

price associated based on number of firms in the industry. more firms=lower cost of resources so we sell product at a lower price to get to LR Eqbm

Question 21

In LR what 2 types of efficiency is achieved

Answer 21

productive efficiency and allocative efficiency

Question 22

productive efficiency and how consumers benefit

Answer 22

producing output level where P=minimum ATC (Normal Profit)
producing at the cheapest way possible
consumers benefit buy paying lowest price

Question 23

Allocative Efficiency and how consumers benefit

Answer 23

producing where P=MC

producing the correct amount that society wants

Question 24

consumer surplus

Answer 24

difference between what a consumer is willing to pay and what they actually pay (Market Price)

area below demand curve and above market price

Question 25

producer surplus

Answer 25

Difference between the market price (actual payment) and the minimum price a producer would be willing to accept

Question 26

Describe the LR surplus when for when a single firm is producing where P=MC=minimum ATC

Answer 26

The firms are all achieving productive and allocative efficiency so total surplus of consumers and producers is maximized in LR

Question 27

allocative efficiency and MB, MC and distribution of resources to produce goods

Answer 27

when demand is above supply curve, MB>MC therefore society values goods more then the cost of them therefore companies should redirect resources to produce those goods

Question 28

Dynamic Adjustments of Perfectly Comp Firms (3)

Answer 28

• change in consumer tastes
• resource supply
• technology

Question 29

how might a change in demand affect efficiency and how will in the LR the industry will adjust to achieve allocative efficiency

Answer 29

demand increases which leads to increase marginal production which leads to profits which leads to efficiency loss so expansion of firms occur, supply increases, MP back at eqbm and allocative efficiency is resorted

Question 30

invisible hand

Answer 30

businesses and suppliers seek to further self interest

Question 31

what does self interest of of resource suppliers or businesses lead to (2)

Answer 31

• high efficient allocation of of resources

- maximum profits for industries and maximizes consumer satisfaction

Question 32

In LR economic profit is zero so how might a entrepreneurs increase profits beyond normal profit (2)
is this is SR or LR

Answer 32

In the SR!

• decrease cost of production by innovating
• new product development=no competition

Question 33

Creative Destruction what is it caused by

Answer 33

caused by competition and innovation

Question 34

Creative Destruction what is it

Answer 34

• new ways of producing an existing product that will destroy an existing products production methods or producing a new product that will destroy the current existing product

Question 35

creative destruction what does it lead to and example

Answer 35

destruction of the old products and methods ex tv cable to netflix & disney plus