Name: ________________________ Class: ___________________ Date: __________
ID: A
CH 13 short answers questions
Essay
1. Why do you never see firms in a perfectly competitive market advertise their product?
2. What four conditions define a perfectly competitive market?
3. "Perfectly competitive firms have total control over the price they set for their product." Explain why the
previous statement is correct or incorrect.
4. Why are perfectly competitive ranchers in Montana price takers?
5. Pineapple growing is a perfectly competitive industry. How does the market demand curve for pineapples
compare to the demand curve for an individual pineapple grower?
6. If the market price faced by a perfectly competitive firm increases, in the short run how does the firm
respond?
7. What is a perfectly competitive firm's short-run supply curve?
8. If the price received by a perfectly competitive firm is less than its average variable cost, what will the firm do
in the short run? Why?
9.
Pete is a perfectly competitive rose grower. The above table gives quantities and the price for which Pete can
sell his roses.
a. What is Pete's total revenue if he sells 1 dozen roses? 2 dozen roses? 3 dozen roses? 4 dozen roses?
b. What is the marginal revenue of the 2nd dozen roses sold? Of the 3rd dozen? Of the 4th dozen?
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Name: ________________________
ID: A
10.
The above table gives Amy's total cost schedule for producing holiday wreaths. Amy is a perfect competitor
and can sell each wreath for $9.
a. Complete the table by calculating Amy's total revenue and her profit or loss schedule.
b. When Amy is producing 4 wreaths, what is her total cost? What is her total revenue? What is her economic
profit or economic loss?
c. What number of wreaths maximizes Amy's profit?
11.
Jimmy grows corn. His total revenue and total cost are in the above table. What quantity of corn maximizes
his profit and what is his profit? What is the marginal revenue and marginal cost at this quantity?
12.
The above table shows the total cost schedule for a perfectly competitive firm. The market price is $250 per
unit. Complete the table.
2
Name: ________________________
ID: A
13.
Acme is a perfectly competitive firm. It has the cost schedules given in the above table and has a fixed cost of
$12.00. The price of Acme's product is $14.20. What is Acme's most profitable amount of output? What is
Acme's total economic profit or loss?
14.
The above diagram shows the cost curves for a perfectly competitive wheat farmer. At what price does the
wheat farmer shut down?
15. What is the relationship between the price, P, and the average total cost, ATC, for a firm in perfect
competition that earns an economic profit? That earns a normal profit? That incurs an economic loss?
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Name: ________________________
ID: A
16.
The above diagram shows the cost curves for a perfectly competitive wheat farmer. At what price(s) does the
wheat farmer earn an economic profit? Earn a normal profit? Incur an economic loss? How many bushels of
wheat does the farmer produce if the price is $3 per bushel? If the price is $0.50 per bushel?
17. In the long run, perfectly competitive firms cannot earn an economic profit. Why?
18. The U-pick berry market is perfectly competitive. Suppose that all U-pick blueberry farms have the same cost
curves and all are earning an economic profit. What happens as time passes? What is the long-run equilibrium
outcome?
19. When will new firms enter a perfectly competitive market? When does entry stop?
20. Describe how economic losses are eliminated in a perfectly competitive industry.
21. How does a decrease in the demand for wheat ultimately lead to normal profits for wheat growers in the long
run?
22. Entry by competitive firms decreases the market price, while exit by competitive firms increases the market
price. Explain why firms enter or exit an industry and why these price changes occur.
23. In the long run, a perfectly competitive firm earns zero economic profit. What incentive does the firm have to
stay in business if it is making zero economic profit?
24. With regard to its profits and losses, how is the short run different from the long run for a perfectly
competitive firm?
25. During the middle of the 1990s, the price of pork rose. After a couple of years the price decreased back to
about the level before the initial increase. What might have led to these events?
4
Name: ________________________
ID: A
26.
American restaurants receive their supply of baby back-ribs from American farms and from farms in
Denmark. In the figures above, the left diagram shows the perfectly competitive market for baby back ribs in
the United States. The right figure shows the situation at Premium Standard Farm in Kansas, one of the many
U.S. farms supplying these ribs.
Now assume that the United States imposes a ban on European meat in response to the foot-and-mouth
disease that has infected livestock in Europe. (Which the United States did in 2001.) In particular, suppose
that the U.S. ban decreases the supply by 40 tons a year. Using the figure on the left, show the impact of this
ban on the baby back rib market. Using the figure on the right, show the impact on Premium Standard Farm in
Kansas.
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Name: ________________________
ID: A
27. Suppose the bobby pin industry is perfectly competitive. The price of a packet of bobby pins is $2.00. Pins
and Needles, Inc. is a firm in this industry and is producing 1,000 packets of bobby pins per day at the point
where the MC = MR. The average cost of production at this output level is $1.50 per packet.
a. What is the marginal cost of the 1,000th packet?
b. Is this firm making an economic profit, a normal profit, or an economic loss? How much?
c. Is the firm in long-run equilibrium? Why or why not?
6
ID: A
CH 13 short answers questions
Answer Section
ESSAY
1. ANS:
Advertising has costs and benefits for the typical firm. The cost is the expense of running the advertising and
the forgone value of the next best use of the firm's funds. The benefit of advertising is the increased
probability that the firm can increase the demand for its good or service. Therein lies the problem for perfectly
competitive firms. Perfectly competitive firms sell an identical product. Who is going to believe an asparagus
farmer in California that runs a television ad proclaiming that her asparagus is better than other farmers? If
demand is not increased by the ad, which is likely, the only thing that is certain is that the farmer's costs have
increased. Along with the higher costs comes decreased profit and an increased likelihood of going out of
business.
PTS: 1
DIF: Level 5: Critical thinking
OBJ: Checkpoint 13.1
TOP: Market types
2. ANS:
The four conditions are that:
a. many firms sell an identical product to many buyers.
b. there are no restrictions on entry into (or exit from) the market.
c. established firms have no advantage over new firms.
d. sellers and buyers are well informed about prices.
PTS: 1
DIF: Level 1: Definition
OBJ: Checkpoint 13.1
TOP: Perfect competition
3. ANS:
The statement is incorrect. Perfectly competitive firms are price takers, which means that they have no control
over the price of their product. They must "take" the price given to them by the market as a whole, that is,
they must take the price determined by the market demand and market supply.
PTS: 1
DIF: Level 2: Using definitions
OBJ: Checkpoint 13.1
TOP: Price taker
4. ANS:
Because one farmer's beef is identical to another farmer's, each farmer's beef is a perfect substitute for all
other farmers' beef. In addition, there are over one million ranchers in the United States. As a result, no
individual rancher can impact the market price by increasing or decreasing production. Therefore each
rancher faces a perfectly elastic demand. Each can sell all of the beef desired at the market price, but not one
penny more. Once the market sets the price, the rancher must take as given whatever the price might be.
PTS: 1
DIF: Level 2: Using definitions
OBJ: Checkpoint 13.1
TOP: Price taker
5. ANS:
The market demand curve for pineapples is downward sloping. The demand curve for an individual pineapple
grower is a horizontal line. In other words, the demand faced by an individual grower is perfectly elastic
whereas the market demand is not perfectly elastic.
PTS: 1
TOP: Demand
DIF: Level 1: Definition
1
OBJ: Checkpoint 13.1
ID: A
6. ANS:
If the market price rises, a perfectly competitive firm increases its output. Essentially the firm moves upward
along its marginal cost curve, thereby increasing the quantity the firm will supply.
PTS: 1
DIF: Level 2: Using definitions
OBJ: Checkpoint 13.1
TOP: Firm's short-run supply curve
7. ANS:
A perfectly competitive firm's short-run supply curve is its marginal cost curve above the minimum average
variable cost.
PTS: 1
DIF: Level 2: Using definitions
OBJ: Checkpoint 13.1
TOP: Firm's short-run supply curve
8. ANS:
If the price is less than the average variable cost, the firm will shut down in the short run. By shutting down,
the firm will incur an economic loss equal to its fixed cost. Whereas if the firm operated, its economic loss
would be larger. Therefore the firm minimizes its loss by shutting down.
PTS: 1
DIF: Level 2: Using definitions
OBJ: Checkpoint 13.1
TOP: Shut down
9. ANS:
a. The total revenue when 1 dozen roses is sold is $12. When Pete sells 2 dozen roses, the total revenue is
$24. When 3 dozen roses are sold, the total revenue is $36. And the total revenue when 4 dozen roses are sold
is $48.
b. The marginal revenue is always $12 per dozen roses.
PTS: 1
DIF: Level 2: Using definitions
TOP: Total revenue | marginal revenue
10. ANS:
OBJ: Checkpoint 13.1
a. The completed table is above.
b. When Amy is producing 4 wreaths, her total cost is $28, her total revenue is $36, and her economic profit
is $8.
c. Amy can produce 6 or 7 wreaths, with a maximum economic profit of $14.
PTS: 1
DIF: Level 3: Using models
TOP: Profit maximization
2
OBJ: Checkpoint 13.1
ID: A
11. ANS:
Jimmy's profit is greatest if he grows either 40,000 or 50,000 bushels of corn. His (economic) profit at either
amount is $10,000 a week. Between 40,000 and 50,000 bushels of corn, Jimmy's marginal revenue is
$30,000, or $3 per bushel and his marginal cost is $30,000, or $3 per bushel.
PTS: 1
DIF: Level 3: Using models
TOP: Profit maximization
12. ANS:
OBJ: Checkpoint 13.1
The completed table is above.
PTS: 1
DIF: Level 3: Using models
OBJ: Checkpoint 13.1
TOP: Profit maximization
13. ANS:
The profit maximizing level of output is either 7 or 8 units. Acme's total economic profit is the economic
profit per unit times the number of units produced. The economic profit per unit equals the price minus the
average total cost. To calculate average total cost, note that when Acme produces 8 units, the average variable
cost per unit is $6.50 and the average fixed cost is $1.50, so Acme's average total cost equals $8.00. Thus
Acme makes an economic profit of $14.20 - $8.00 = $6.20 per unit. Hence Acme's total economic profit is
($6.20) × (8 units) = $49.60. Acme's total economic profit when it makes 7 units is (except for rounding)
identical.
PTS: 1
DIF: Level 3: Using models
OBJ: Checkpoint 13.1
TOP: Profit maximization
14. ANS:
The wheat farmer shuts down if the price is less than the minimum average variable cost. So in the figure, the
wheat farmer shuts down if the price is less than $2 per bushel.
PTS: 1
DIF: Level 3: Using models
OBJ: Checkpoint 13.1
TOP: Shut down point
15. ANS:
If the price is greater than the average total cost, P > ATC, the firm earns an economic profit. If the price
equals the average total cost, P = ATC, the firm earns a normal profit. If the price is less than the average total
cost, P < ATC, the firm incurs an economic loss.
PTS: 1
DIF: Level 2: Using definitions
TOP: Economic profit | economic loss
3
OBJ: Checkpoint 13.2
ID: A
16. ANS:
At any price that exceeds the minimum of the average total cost the farmer earns an economic profit. So the
farmer earns an economic profit if the price is greater than $2 per bushel. The farmer earns a normal profit if
the price equals the minimum total cost. So the farmer earns a normal profit if the price is $2 per bushel.
Finally, the farmer incurs an economic loss if the price is less than the minimum average total cost. So the
farmer incurs an economic loss if the price is less than $2 per bushel.
If the price is $3 per bushel, the farmer produces 30,000 bushels of wheat per year. If the price is $0.50 per
bushel, the farmer has shut down because the price is less than the minimum average variable cost and so the
farmer produces 0 bushels per year.
PTS: 1
DIF: Level 4: Applying models
OBJ: Checkpoint 13.2
TOP: Economic profit
17. ANS:
An economic profit attracts entry by new firms. As new firms enter the market, the market supply increases
and the market supply curve shifts rightward. The increase in supply decreases the price. And, as the price
falls, the economic profit is eliminated.
PTS: 1
DIF: Level 2: Using definitions
OBJ: Checkpoint 13.3
TOP: Long-run equilibrium | entry
18. ANS:
The presence of economic profit attracts new firms into the U-pick blueberry market. As the new firms (the
new farmers) enter the market, the supply of U-pick blueberries increases. The increase in the supply drives
the price lower and decreases the economic profits of the existing farmers. New farmers continue to enter the
market as long as there is the possibility of an economic profit. Eventually enough new firms enter so that the
price is driven so low that the economic profit is eliminated. All the firms earn a normal profit, which will
keep them in business but will provide no incentive for new firms to enter the market. At this point, the
long-run equilibrium has been reached.
PTS: 1
DIF: Level 3: Using models
OBJ: Checkpoint 13.3
TOP: Long-run equilibrium | entry
19. ANS:
New firms will enter a perfectly competitive market as long as the existing firms are earning an economic
profit. Essentially the new firms enter in order to earn an economic profit themselves. Entry will stop when it
is no longer possible to earn an economic profit, which occurs when the existing firms are earning a normal
profit.
PTS: 1
DIF: Level 3: Using models
OBJ: Checkpoint 13.3
TOP: Long-run equilibrium | entry
20. ANS:
If firms are making losses, some will exit in the long run. When firms exit, the market supply decreases and
the market supply curve shifts leftward. When supply decreases, the price rises. As the price rises, the
surviving firms increase production and their economic losses are eliminated.
PTS: 1
DIF: Level 2: Using definitions
TOP: Long-run equilibrium | exit
4
OBJ: Checkpoint 13.3
ID: A
21. ANS:
If the demand for wheat decreases, the price of wheat falls and many wheat farmers incur economic losses.
These losses lead to some farmers shutting down their operations. As these farmers exit the market, the supply
of wheat decreases. A decrease in the supply of wheat pushes wheat prices back up. The process of exit and
rising prices continues until finally the price of wheat rises enough so that the surviving wheat farmers are
earning a normal profit. At this time, which occurs in the long run, the economic losses have disappeared and
no further exit occurs. The wheat market is back in its long-run equilibrium.
PTS: 1
DIF: Level 3: Using models
OBJ: Checkpoint 13.3
TOP: Long-run equilibrium | exit
22. ANS:
Competitive firms will enter an industry where economic profits exist in an attempt to earn an economic
profit. As new firms enter, the supply increases and the supply curve for the product shifts rightward. The
increase in supply drives the price lower. Firms exit an industry when economic losses are incurred. As they
leave, supply decreases and the supply curve shifts leftward. The decrease in the supply forces the price
higher. Entry and exit continue until the remaining firms in the industry are earning a normal profit.
PTS: 1
DIF: Level 3: Using models
OBJ: Checkpoint 13.3
TOP: Long-run equilibrium | entry and exit
23. ANS:
Zero economic profits do not mean no profit whatsoever. The firm is still making a normal profit. A normal
profit compensates the firm's owners enough to keep the firm in business because it is equal to the owner's
opportunity cost. Hence the firm has the incentive to stay in business.
PTS: 1
DIF: Level 3: Using models
OBJ: Checkpoint 13.3
TOP: Long-run equilibrium
24. ANS:
The firm can earn an economic profit, incur an economic loss in the short run, or earn a normal profit in the
short run. In the long run, however, the only possible outcome is a normal profit. An economic profit attracts
entry by new firms and economic losses lead to exit by some firms. Thus, after entry or exit is complete in the
long run, the remaining firms will earn a normal profit.
PTS: 1
DIF: Level 3: Using models
OBJ: Checkpoint 13.3
TOP: Long-run equilibrium
25. ANS:
There are thousands upon thousands of hog farmers in the United States. In the middle of the 1990s, a general
decrease in the demand for beef led to a large increase in the demand for pork (the "other white meat"). As a
result of the increase in market demand, the price of pork increased dramatically. Hog farmers were getting a
high price and earning large economic profits.
In the long run, unable to prevent the flow of information to prospective hog farmers, the word got out that
economic profit was possible in this arena. Over time, more hog farmers entered the market, which led to a
large increase in the supply of pork. As supply increased, the price of pork dropped.
Thus the higher price was the short-run result of an increase in demand. The falling price reflected the
adjustment to the long-run equilibrium, as new hog farmers entered the market. The long run was ultimately
reached and the price of pork was more or less the same as before the increase in demand.
PTS: 1
DIF: Level 5: Critical thinking
TOP: Long-run equilibrium
5
OBJ: Checkpoint 13.3
ID: A
26. ANS:
The ban on European meat decreases the supply of baby back ribs and shifts the supply curve leftward, as
shown by the shift from S1 to S2. The price rises to $4 a pound. As the figure on the right shows, the MR curve
for the Premium Standard Farm will shift upward, from MR1 to MR2. As a result, the farm increases its
production to 40,000 pounds of ribs. Because the price exceeds the average total cost, the Premium Standard
Farm makes an economic profit.
PTS: 1
DIF: Level 3: Using models
TOP: Long-run equilibrium | exit
6
OBJ: Checkpoint 13.3
ID: A
27. ANS:
a. The price per packet is $2, which is also the Pins and Needle's marginal revenue. The marginal cost of the
1,000th packet is equal to marginal revenue, so for Pins and Needles the marginal cost is $2 per packet.
b. The firm is making a $0.50 economic profit per unit (which equals the price minus the average total cost).
Because Pins and Needles produces 1,000 packets, its total economic profit is $500.
c. The firm is making an economic profit, so it is not in long-run equilibrium. In the long run, a perfectly
competitive firm cannot earn an economic profit. The only outcome possible in the long run is a normal
profit.
PTS: 1
DIF: Level 4: Applying models
TOP: Long-run equilibrium
7
OBJ: Checkpoint 13.3