Economics: Principles & Policy
14th Edition
ISBN: 9781337912679
Author: William J. Baumol; Alan S. Blinder; John L. Solow
Publisher: Cengage Learning US
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Question
Chapter 10, Problem 3DQ
(a)
To determine
The slope of the demand curve of a
(b)
To determine
The reason for the zero economic profit
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George Stigler, "Perfect Competition, Historically Contemplated," Journal of Political Economy,Vol. 55, No. 1, (February 1957), pp. 1-17.
Despite the fact that few firms sell identical products in markets where there are no barriers to entry, economists believe that the model of perfect competition is important because
A.
economists prefer studying theoretical markets instead of actual markets.
B.
all markets eventually become perfectly competitive.
C.
it is a
benchmark—a
market with the maximum possible
competition—that
economists use to evaluate actual markets that are not perfectly competitive.
D.
this is the type of market that our business laws protect and promote.
In a perfectly competitive market, the type of decision a firm has to make is different in the short run than in the long run. Which of the following is an example of a perfectly competitive firm's long-run decision?
Group of answer choices
1. how much to spend on advertising and sales promotion
2. what price to charge buyers for the product
3. whether or not to enter or exit an industry
4. the profit-maximizing level of output
Suppose the shirts industry is perfectly competitive and begins in a long-run equilibrium.
(a) Pluto Company invents a new production process that reduces the production cost. What happens to Pluto Company’s profits and the price of shirts in the short run when Pluto Company’s patent prevents other firms from using the new technology?
(b) What happens in the long run when the patent expires and other firms are free to use the technology?
Chapter 10 Solutions
Economics: Principles & Policy
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Similar questions
- If a firm's total revenue is $100, it's total cost is $130, and its total fixed cost is $40. Should the firm stay in business? Explain. How does a firm in perfect competition determine its outputs to produce? Why will the firm not produce this level of output? Explain.arrow_forwardQ17 Which of the following assumptions about perfectly competitive markets is primarily responsible for firms having zero economic profit in long-run equilibrium? a. Each firm is small relative to the size of the industry. b. Consumers are aware of all firms' prices. c. Firms engage in strategic behaviour. d. Products are homogeneous. e. Firms can enter and exit the industry freely.arrow_forwardThe basic model of pure competition reviewed in this chapter finds that in the long run all firms in a purely competitive industry will earn normal profits. If all firms will only earn a normal profit in the long run, why would any firms bother to develop new products or lower-cost production methods? Explain.arrow_forward
- b) Explain what the assumption of free entry and exit in a perfectly competitive market implies for the long run competitive equilibrium?arrow_forwardPerfect competition is an extremely rare type of market in the real world. This is because the conditions necessary for perfect competition are difficult to meet. Write about an example of perfect competition (or at least a market that is very close to perfect competition). Find an example of a market that seems to be perfectly competitive. Explain how your example satisfies the four conditions necessary for perfect competition. Do sellers in the market you’ve described brand themselves to consumers? Does this support the idea that this market is perfectly competitive? Explain. Do different sellers in the market you’ve described charge different prices for their product? Does your answer support the idea that this market is perfectly competitive? Explain. Does it seem as if the example you mentioned is allocatively efficient? In other words, does the market produce enough of this good (or does it produce too much or too little)? Explain.arrow_forwardAssume that the gold-mining industry is perfectly competitive. a) Illustrate a long-run equilibrium using diagrams for the gold market and for a representative gold mine. b) Suppose that an increase in jewelry demand induces a surge in the demand for gold. Using your diagrams, show what happens in the short run to the gold market and to each existing gold mine. c) If the demand for gold remains high, what would happen to the price over time? Specifically, would the new long-run equilibrium price be above, below, or equal to the short-run equilibrium price in part b)? Note:- Do not provide handwritten solution. Maintain accuracy and quality in your answer. Take care of plagiarism. Answer completely. You will get up vote for sure.arrow_forward
- Perfect Competition in the Long Run and Efficiency Scenario Imagine a market where there is perfect competition between two or more companies, such as a fish market where vendors offer the same product at the same price or online ticket auctions like StubHub. In this market there are four key elements to perfect competition: A large number of buyers and sellers: No barriers to entry or exit: Perfect mobility for customers choosing products: Homogenous products. Explain how output, price, and profit are determined in your perfectly competitive market in the long run. How does that lead to efficiency? How could changes in technology affect the market? How could an increase in demand affect the market?What are the effects of new businesses entering the market?What are the effects of businesses leaving the market?arrow_forwardQuestion 5: The avocado growing industry in Chile is perfectly competitive, and each producer has a long-run marginal cost curve given by MC (Q) = 50+5Q. The corresponding long-run average cost function is given by AC' (Q) = 50 +3Q +22. The market demand curve is QD = 350 – 2P. 1. What is the long-run quantity produced by each firm? 2. What is the long-run equilibrium price in this industry? 3. How many active producers are in the avocado growing industry in the long-run competitive market?arrow_forwardA. If a firm operating in a perfectly competitive market doubles the amount it sells, what happens to the price of its output and its total revenue? B. How does a competitive firm determine its profit-maximizing level of output? When does a competitive firm decide to temporarily shut down in the short run? Explain, using the concepts of marginal cost, marginal revenue, price, and average variable cost.arrow_forward
- 1. A) What are the underlying assumptions associated with Perfect Competition? B) Explain why firms operating under Perfect Competition make normal economic profit in the long-run. C) Explain why Perfect Competition results in Allocative Efficiency. D)Explain why Perfect Competition results in Economic Efficiency.arrow_forwarda) How does imperfect competition differ from perfect competition? b) True or False and explain: If a firm in imperfect competition makes economic profit in the short run they can sustain it in the long run. c) True or False and explain: In imperfect competition all firms charge the same price.arrow_forwardSuppose that firm is in a breaking even status in a perfectly competitive market. Using graphs (for both industry and firm) to explain how a decline in demand in the short run affects some firms’ performance (e.g., earn profits or experience loss). In the long run, how this results in exit of some firms from the same perfectly competitive market. Comment on the market equilibrium quantity and price in the long run?arrow_forward
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