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ECON 1B03 Lecture Notes - Lecture 8: Physical Capital

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School
McMaster University
Department
Economics
Course
ECON 1B03
Professor
Holmes

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ECON 1B03 Full Course Notes
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ECON 1B03 Full Course Notes
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Document Summary

Positive economic profits are super high, unexpected profit for firms in that industry. These are the profits that attract entrepreneurs to the industry and induce new firms to enter the market. Firms that consistently losses $ will eventually leave the industry. Normal economic profits are zero economic profits. These are profits you"d expect for firms in that industry. These are nothing special, so no new firms will want to enter the markets but no existing firms will be motivated to exit. Even those these are zero economic profits, the firms is still making an accounting profit. For example , you might be making a year in accounting profit, if this is a decent return and typical for that industry, an economist will see that as a zero economic profit. Shows the relationship between quantity of inputs used to make a good and the quantity of output of that good.

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Related Questions


1.
If firms in a monopolistically competitive market are earningpositive profits,
A) firms will likely be subject to regulation.
B) barriers to entry will be strengthened.
C) some firms must exit the market.
D) new firms will enter the market.
2.

Panel c in the set of figures shown is consistent with a firm in amonopolistically competitive market that is


A) earning profit and is in both short-run and long-runequilibrium.
B) earning economic profit and is in short-run equilibrium, but notlong-run equilibrium.
C) earning profit and is in long-run equilibrium, but not short-runequilibrium.
D) earning a negative profit and is not in equilibrium.
3.
When a profit-maximizing firm in a monopolistically competitivemarket is producing the long-run equilibrium quantity,
A) its marginal revenue will exceed its marginal cost.
B) its average revenue will equal its marginal cost.
C) it will be earning positive economic profits.
D) its demand curve will be tangent to its average-total-costcurve.
4.
Monopolistic competition differs from perfect competition becausein monopolistically competitive markets
A) each of the sellers offers a somewhat different product.
B) strategic interactions between firms is vitally important.
C) there are barriers to entry.
D) all firms can eventually earn economic profits.
5.
The free entry and exit of firms in a monopolistically competitivemarket guarantees that
A) economic losses can persist into the long run, but not economicprofits.
B) both economic profits and economic losses can persist into thelong run.
C) economic profits can persist into the long run, but not economiclosses.
D) both economic profits and economic losses disappear in the longrun.
6.


Panel (a) shows a profit-maximizing monopolistically competitivefirm that is

A) All answers are correct
B) earning a zero profit.
C) charging a price that is equal to average total cost.
D) in long-run equilibrium.
7.
Since a firm in a monopolistically competitive market faces a
A) perfectly elastic demand curve, it will always operate withexcess capacity.
B) downward-sloping demand curve, it will always operate atefficient scale.
C) perfectly inelastic demand curve, it will always operate atefficient scale.
D) downward-sloping demand curve, it will always operate withexcess capacity.
8.
In a monopolistically competitive market,
A) firms can enter or exit the market without restriction.
B) each firm takes the price of its product as given.
C) each firm produces a product that is essentially identical tothe products of other firms in the market.
D) there are only a few sellers.
9.
The fact that there is a great deal of advertising of menĆ¢Ā€Ā™s shavingproducts indicates that
A) it costs firms very little to produce those products.
B) the market for those products is perfectly competitive.
C) those products are highly differentiated.
D) All answers are correct
10.
A profit-maximizing firm in a monopolistically competitive marketdiffers from a firm in a perfectly competitive market because thefirm in the monopolistically competitive market
A) has no barriers to entry.
B) faces a downward-sloping demand curve for its product.
C) faces a horizontal demand curve at the market clearingprice.
D) is characterized by market share maximization.

11. When firms have an incentive to exit a competitive market, their exit will:

a. drive down market prices.

b. drive down the profits of existing firms in the market.

c. decrease the quantity of goods supplied in the market.

d. All of the above are correct.

Ā 

12. If a perfectly competitive firm currently produces where the price is greater than the marginal cost, it:

a. will increase its profits by producing more.

b. will increase its profits by producing less.

c. is making positive economic profits.

d. is making negative economic profits.

Ā 

13. Does a consumer well being vary along a demand curve?

a. Yes. When price increases, consumers move to a lower indifference curve.

b. Yes. When price increases, consumers move to a higher indifference curve.

c. No. When price increases, consumers stay on the same indifference curve.

d. No. When price increases, the higher price has no effect on budget constraints or indifference curves.

e. None of the above

Ā 

14. If a competitive firm sets its output such that marginal revenue, marginal cost, and average total cost are equal, economic profit must be:

a. Negative

b. positive

c. Zero

d. Indeterminate from the given information

Ā 

15. Which of the following is a characteristic of a perfectly competitive market?

a. Firms are price setters.

b. There are few sellers in the market.

c. Firms can exit and enter the market freely.

d. All of the above are correct.

11)

A constant-cost, perfectly competitive industry experiences a permanent increase in demand. In adjusting to this change, what will happen to the price of the product?

Ā 

It will increase in the short-run and then decrease in the long-run, but end up above its original level in the long-run.
Ā 

It will increase in the short-run and then increase further in the long-run.
Ā 

It will increase in the short-run and then decrease back to its original level in the long-run.
Ā 

It will increase in the short-run and then decrease below its original level in the long-run.
Ā 

It will decrease in the short-run but return to its original level in the long-run.

12)

Assume that a perfectly competitive firm owns or rents a higher-quality resource that results in lower average total costs and higher economic profits in the short run. What will happen in the long-run?

Ā 

The price of the higher-quality resource will be bid upward resulting in economic rents and equalizing costs across firms.
Ā 

New firms will enter and compete with any excess profits away.
Ā 

None of the other answers is correct.
Ā 

The government will tax away any excess profits.
Ā 

The firm with the higher-quality resource will earn positive economic profits in the long run.

13)

Which of the following are characteristics of long-run equilibrium?

Ā 

No firm has an incentive to change its level of output.
Ā 

No firm has an incentive to change its plant size.
Ā 

Economic profit is zero
Ā 

All of the above
Ā 

None of the above

14)

Which of the following statements is consistent with the textbookĆ¢Ā€Ā™s analysis of perfect competition?

Ā 

Although individual perfectly competitive firms wonĆ¢Ā€Ā™t pay to advertise, the industry as a whole may well advertise.
Ā 

Higher costs for one firm in the industry will result in that firm charging a higher price than the other firms in the industry.
Ā 

If all the firms in an industry charge an identical price for their products, this is clear evidence of collusive behavior.
Ā 

All of the above
Ā 

None of the above

15)

The assumptions that define the market structure known as monopoly include which of the following?

Ā 

High barriers to entry.
Ā 

There is one seller.
Ā 

There are no close substitutes available.
Ā 

All of the above
Ā 

None of the above