micro
QUESTIONS chap12
3. How do the entry and exit of firms in a purely competitive industry affect resource flows and long‐run profits and losses? LO3
Answer: Entry and exit help to improve resource allocation. Firms that exit an industry due to low profits release their resources to be used more profitably in other industries. Firms that enter an industry chasing higher profits bring with them resources that were less profitably used in other industries. Both processes increase allocative efficiency.
In the long run, the market price of a product will equal the minimum average total cost of production. Thus, long run economic profits are zero.
7. The 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. LO6
Answer: Competition involves the never-ending attempts by entrepreneurs and managers to earn above-normal profits by either creating new products or developing lower-cost production methods for existing products. These efforts cause creative destruction, the financial undoing of the market positions of firms committed to existing products and old ways of doing business by new firms with new products and innovative ways of doing business. That is, if firms can innovate they can earn economic profit in the short run.
PROBLEMS
2. A firm in a purely competitive industry is currently producing 1200 units per day at a total cost of $600. If the firm produced 1000 units per day, its total cost would be $400, and if it produced 700 units per day, its total cost would be $375. What is the firm’s ATC per unit at these three levels of production? If every firm in this industry has the same cost structure, is the
3. How do the entry and exit of firms in a purely competitive industry affect resource flows and long‐run profits and losses? LO3
Answer: Entry and exit help to improve resource allocation. Firms that exit an industry due to low profits release their resources to be used more profitably in other industries. Firms that enter an industry chasing higher profits bring with them resources that were less profitably used in other industries. Both processes increase allocative efficiency.
In the long run, the market price of a product will equal the minimum average total cost of production. Thus, long run economic profits are zero.
7. The 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. LO6
Answer: Competition involves the never-ending attempts by entrepreneurs and managers to earn above-normal profits by either creating new products or developing lower-cost production methods for existing products. These efforts cause creative destruction, the financial undoing of the market positions of firms committed to existing products and old ways of doing business by new firms with new products and innovative ways of doing business. That is, if firms can innovate they can earn economic profit in the short run.
PROBLEMS
2. A firm in a purely competitive industry is currently producing 1200 units per day at a total cost of $600. If the firm produced 1000 units per day, its total cost would be $400, and if it produced 700 units per day, its total cost would be $375. What is the firm’s ATC per unit at these three levels of production? If every firm in this industry has the same cost structure, is the