ECO101H1 Lecture Notes - Organic Food, Marginal Revenue, Fixed Cost

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13 Nov 2013

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Students agree: if dd for organic food increases, (economic) profits of organic farms will increase, in the long run, these profits will disappear as more farmers switch to organic crops. Short-run versus long-run impact of an increase in demand. Individual firm: p1 > atc => firms earn economic profits, firms enter industry => ss shifts to ss1 and p1 falls. Market: p1 falls as new firms enter, if constant cost industry, p1 falls to p0, industry output increases from q1 to q2 (more firms) In response to higher dd by consumers firms initially earn economic profits new firms enter industry market price falls (to initial level, if constant cost industry) economic profits are eliminated. Demand increases, market price increases (from to ) Case 1: new firms have identical cost schedules as existing firms. In long run, p= = minimum (unchanged) atc. 10,000 old firms and 1,000 new earn zero economic profits.

Related Questions

1. In a constant cost industry, P = AC = $20. Which sequence of events follows an increase in demand?

a. P = AC, firms make no economic profit, existing firms leave output unchanged, new firms enter the industry, profits remain normal, P = AC = $20.

b. P > AC, firms make an economic profit, existing firms expand output, new firms enter the industry, the short-run supply curve shifts left, price falls until profits return to $0.

c. P > AC, firms make an economic profit, existing firms expand output, new firms enter the industry, the short-run supply curve shifts right, price falls until profits return to $0.

d. P < AC, firms suffer an economic loss, existing firms reduce output, new firms enter the industry, the short-run supply curve shifts right, price falls until profits exceed $0.

2. Describe the supply curve of a constant cost industry.

a. Upward sloping

b. Flat

c. Downward sloping, then upward sloping

d. Downward sloping

3. At the profit-maximizing output level P = MC, if P > AC then firms can earn an above-normal profit, causing entry into the industry. True or false?

4. In a competitive market, the amount of a good that is produced is such that social surplus is:

a. Minimized

b. Maximized

c. Zero

d. Hidden

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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?

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

	The price of the higher-quality resource will be bid upward resulting in economic rents and equalizing costs across firms.
	New firms will enter and compete with any excess profits away.
	None of the other answers is correct.
	The government will tax away any excess profits.
	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?

	No firm has an incentive to change its level of output.
	No firm has an incentive to change its plant size.
	Economic profit is zero
	All of the above
	None of the above

14)

Which of the following statements is consistent with the textbookâs analysis of perfect competition?

	Although individual perfectly competitive firms wonât pay to advertise, the industry as a whole may well advertise.
	Higher costs for one firm in the industry will result in that firm charging a higher price than the other firms in the industry.
	If all the firms in an industry charge an identical price for their products, this is clear evidence of collusive behavior.
	All of the above
	None of the above

15)

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

	High barriers to entry.
	There is one seller.
	There are no close substitutes available.
	All of the above
	None of the above

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Q8. To arrive at a logical determination of a firm's optimum output, economists assume that the firm seeks to
a. maximize output
b. minimize cost
c. maximize profit or minimize loss
d. maximize price

Q9. So long as marginal cost is rising, average variable cost must rise.
a. true
b. false

Q10. As output increases, marginal cost increases, reaches a maximum, and then falls.
a. true
b. false

Q11. Which of the following is the best example of variable cost?
a. depreciation on a building
b. property taxes
c. wages
d. rent paid for one's building

Q12. If the AVC is $12, the AFC is $4, the AR is $20, and output is 6,000 units, the total profit is
a. $72,000
b. $48,000
c. $24,000
d. negative $96,000

Q13. Under perfect competition, if a firm is suffering a loss,
a. MR exceeds ATC
b. AR equals AVC
c. AR equals ATC
d. AR is less than ATC

Q14. Elaine's firm is in a perfectly competitive industry. Why doesn't Elaine try to sell more of her product by lowering its price below the market price?
a. her demand curve is not elastic
b. doing so would be considered unethical price chiseling
c. her competitors would not allow it
d. she can sell all she wants at the market price

Q15. In the long run, perfect competition results in firms producing
a. at the minimum point of their long-run average cost curves, which indicates allocative efficiency
b. where price equals marginal cost, which indicates economic efficiency
c. where price equals marginal cost, which indicates the optimal scale of operation
d. at the minimum point of their long-run average cost curves, which indicates economic efficiency

Q16. On a graph of average cost curves, the space between ATC and AVC represents AFC.
a. true
b. false

Q18. If MC equals MR at a point greater than ATC, the perfectly competitive firm will
a. sustain a loss
b. shut down
c. make an economic profit
d. expand output

Q19. Since all producers have the same average revenue under conditions of perfect competition, they all have the same profits in the short run.
a. true
b. false

Q20. If the entry of new firms in a perfectly competitive industry substantially increases the market demand for resources,
a. this reduces the market price of resources
b. this raises the market price of resources
c. the market price of resources does not change
d. this lowers the ATC curves of individual firms

Q22. Under conditions of perfect competition, profits exist whenever AR is above AVC at equilibrium output.
a. true
b. false

Q23. Under perfect competition, market price is determined by market demand and supply.
a. true
b. false

Q24. If one firm in a perfectly competitive industry is somehow able to produce at a lower cost than competing firms in the short run,
a. the competing firms will adopt similar production techniques in the long run
b. the more efficient firm will earn higher profits than the competing firms in the long run
c. the competing firms will earn higher profits than the more efficient firm in the short run
d. the competing firms will go out of business in the long run

ECO101H1 Lecture Notes - Organic Food, Marginal Revenue, Fixed Cost

ECO101H1 Full Course Notes

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