Economics and Market Demand

Topics: Economics, Profit, Inverse demand function Pages: 2 (330 words) Published: June 19, 2013
CSUC ECON 103 MacNeil SAMPLE QUIZ ON LONG-RUN EQUILIBRIUM SPRING 2013

Assume all the firms in a perfectly competitive industry are identical. AT FIRST, the industry is in long run equilibrium. Then market demand for the output of the industry increases. All the questions are about this case.

1. IN THE SHORT RUN, the increase in market demand causes market price to: (a) rise.
(b) fall.
(c) stay the same.

2. IN THE SHORT RUN, the increase in market demand causes each firm: (a) to raise its level of output.
(b) to lower its level of output.
(c) to make no change in its level of output.

3. IN THE SHORT RUN, the increase in market demand causes the firms in the industry to experience: (a) above normal profits.
(b) below normal profits.
(c) only normal profits.

4. Following the adjustments you described above, IN THE LONG RUN, the increase in market demand causes: (a) firms to enter the industry.
(b) firms to exit the industry.
(c) neither entry nor exit.

5. ONCE A NEW LONG RUN EQUILIBRIUM (LRE) IS ESTABLISHED, there will be: (a) more firms in the industry than in the old LRE.
(b) fewer firms in the industry than in the old LRE.
(c) the same number of firms in the industry as in the old LRE.

6. ONCE A NEW LRE IS ESTABLISHED, total industry output will be: (a) more than in the old LRE.
(b) less than in the old LRE.
(c) the same as in the old LRE.

7. ONCE A NEW LRE IS ESTABLISHED, each firm will have:
(a) normal profit (economic profit of zero).
(b) positive profit.
(c) negative profit (that is, economic profits will be less than zero—each firm will be suffering economic losses).

Answers: All are (a).

Also note that if instead we started in LRE and then demand decreased: * The answers to 1 – 6 would all be (b)
* The answer to 7 would still be (a).
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