BR9B: Bridge: Competition in the Long Run
Question 1
As an industry expands, more manufacturing companies are able to increase their productivity due to specialization. This industry is likely to be a(n):
A. incremental cost industry.
B. decreasing cost industry.
C. constant cost industry.
D. increasing cost industry.
Hint
Decreasing cost industries tend to benefit from economies of scale. As output expands, specific firms and workers at these firms are able to specialize in a particular niche and tailor technology to their exact needs.Constant cost industries are generally able to continuously obtain the necessary resources for any level of demand of the associated product.
Answer
B. decreasing cost industry. As companies within an industry specialize, they are able to identify opportunities where they may possess a comparative advantage, and they may benefit from economies of scale. Specializing also allows companies to leverage applicable technology in a superior manner and focus the training and education of employees, both actions which decrease costs.Question 2
In the long run, positive economic profits ____, while economic losses _____.
A. encourage market exit; also encourage market exit
B. encourage market exit; encourage market entry
C. encourage market entry; also encourage market entry
D. encourage market entry; encourage market exit
Hint
If you're thinking about starting a business, how would you respond if all your competitors are incurring heavy losses?Answer
D. encourage market entry; encourage market exit In a monopolistically competitive industry, firms can earn positive or negative economic profits in the short run. If firms earn positive economic profits, outside firms will be enter the market, increasing the market supply, and causing price to fall. The decline in price will eliminate the positive economic profits that compelled the outside firms to enter the market, establishing zero economic profits in the long run. Similarly, if firms earn negative economic profits, or economic losses, firms will exit the market, decreasing the market supply, and causing price to rise. The rise in price will eliminate the economic losses that compelled firms to exit, again establishing zero economic profits in the long run.Question 3
Which of the following is true in the long run for competitive industries?
A. Variable costs are zero.
B. Average total cost equals price.
C. Marginal cost is greater than average cost.
D. Fixed costs are greater than variable costs.
Hint
Profit can be expressed as$\text{Profit} = Q\times(P - ATC)$
where $Q$ is output, $P$ is price, and $ATC$ is average total cost.
Answer
B. Average total cost equals price. In the long run, if profits in a competitive industry are positive, firms will enter the market, and price and profits will fall. Conversely, if profits are negative, firms will exit the market, and price and profits will rise. At a result of these processes, profits will be zero in the long run. Profit can be expressed as$\text{Profit} = Q\times(P - ATC)$
where $Q$ is output, $P$ is price, and $ATC$ is average total cost. The equation implies that a firm will have zero profits only if average total cost equals price.
Question 4
The appearance of the iPad marked a new era in the highly competitive industry of tablets. As other sellers, such as Amazon and Samsung, realized the success of this product, they introduced their own tablets. All else equal, what should happen to the price of tablets in the next five years?
A. Prices will not change very much.
B. Prices will increase.
C. Prices will decrease.
Hint
Consider a supply and demand diagram. As new tablets enter the market, which curve is affected, and how will it shift?Answer
C. Prices will decrease. As supply rises in an industry, all else equal, price will fall.Question 5
Roy makes so much money in his private tutoring business that all of his classmates started their own tutoring businesses. What is the effect of competition on the market for tutoring?
A. The supply curve will shift right, and price will rise.
B. The supply curve will shift right, and price will fall.
C. The demand curve will shift right, and price will fall.
D. The demand curve will shift right, and price will rise.