Principles of Economics (12th Edition)
12th Edition
ISBN: 9780134078779
Author: Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher: PEARSON
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Chapter 9, Problem 3.7P
To determine
Long run incentives for the firm.
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Under a PCM, the long run equilibrium situation is that, Economic profit is equal to zero. Is this a breakeven point for all firms in the market? Please explain conceptually.
The graph below shows a particular firms marginal revenue (mr) marginal cost (mc) and average total cost (atc) curves, where the market is competitive. Suppose that a new management team is brought in and that this team is initially less concerned about maximizing profits than it is simply about making a profit. What range of production quantities will allow the firm to operate while earning a profit?
Give you're answer by dragging the qmin to Qmax lines into their correct positions. The output will need to lie somewhere between those limits.
Explain why a firm might want to produce its good even after diminishing marginal returns have set in and marginal cost is on the rise.
People often believe that large firms in an industry have cost advantages over small firms in the same industry. For example, they might think a big oil company has a cost advantage over a small oil company. For this to be true, what condition must exist? Explain your answer.
Chapter 9 Solutions
Principles of Economics (12th Edition)
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- Demand in an industry is expected to decrease permanently. Before the decrease in demand the industry was in a long-run equilibrium in which the number of firms was stable. What does the perfect competition model predict will happen to the price in the long-run after the decrease in demand? Group of answer choices The price will decrease The price will decrease if it is an increasing cost industry. The price will increase if it is an increasing cost industry. The price will increasearrow_forwardWhy is the perfect competition often used as a benchmark? Question 3 options: The perfect competition model is more frequently observed in the real world compared to other market models It provides a useful comparison to markets that operate in more complex, real-world conditions. It accounts for a variety of issues like pollution, inventions of new technology, poverty, and government programs that other models do not account for. In the real world, all markets are perfectly competitive, so this model allows us to compare them to one another.arrow_forwardUnit10 - Microeconomics Multiple choice A firm in perfect competition is a price taker because there are no good substitutes for its good. they are profit maximizers. it is very large. many other firms produce identical products. Under what condition would a perfectly competitive firm who is incurring an economic loss temporarily stay in business? if the total revenue is positive if the total revenue exceeds the variable cost if the total revenue exceeds the fixed cost if the total revenue is increasing When firms in a perfectly competitive market are making earning an economic profit, in the long run, firms will exit the market. firms will continue to earn a profit. average cost will shift downward. firms will enter the market.arrow_forward
- What are the advantages of scale in capitalist competition?arrow_forwardThe relationship between the firm's average variable, average total, and marginal cost curves above: Marginal Reveue = Price = US $ 2.50 ; a) Use the graph to find the Firm's profit-maximizing output. b) If the firm maximizes its profit, how much profit does it make (about)? Should the firm stay in business? c) Will other firms with costs the same as Firms enter the market? Explain.arrow_forwardIf all assumptions of perfect competition hold, why would firms in such an industry have little incentive to carry out technological change or much research and development?arrow_forward
- The elimination principle discussed in this chapter tells us what we can expect in the long run from perfectly competitive markets: zero (normal) profits across industries. If this were the case, and this fate were unavoidable, going into business would seem to be a fairly dismal choice, given that the end result of normal profits is known right out of the gate. Despite this, we constantly see entrepreneurs working hard to earn profits. Is this a waste of time, given what we know about the elimination principle? Is the fate of zero profit unavoidable?arrow_forwardQuestion 2. Automobile manufacturing is an industry subject to significant economies of scale. Suppose there are four domestic auto manufacturers, but the demand for domestic autos is no more than 2.5 times the quantity produced at the bottom of the long-run average cost curve. What do you expect will happen to the domestic auto industry in the long run? Provide graphs where applicablearrow_forwardFor each of the following events identify which of the determinates of demand or supply are affected. Also indicate whether demand or supply is increased or decreased. Why? A stock market crash lowers people’s wealth. Batelco increases the prices of mobile services. Diminishing returns mean rising costs while economies of scale mean falling costs. Therefore, a firm cannot be facing both diminishing returns and economies of scale. Do you agree? Why or why not?arrow_forward
- In perfect competition, firms set price equal to marginal cost. Why can’t firms do this when there are internal economies of scale? Explain the answer.arrow_forwardWhich of the following industries most closely approximates the perfectly competitive model? (a) Automobile,(b) cigarette, (c) newspaper, or (d) wheat farming.arrow_forwardwhat happens to ATC and MC when companies increase the productive capabilities after they invest in human or physical capital, or new technology or they improve their managerial capabilities.arrow_forward
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