If firms in a competitive industry are earning zero economics profits in the sho
ID: 1196143 • Letter: I
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If firms in a competitive industry are earning zero economics profits in the short-run, then one would expect that in the long-run: new firms will enter the industry existing firms will leave the industry firms will neither enter nor leave the industry all firms will shut-down their operations so that total industry output will be zero Assume the market for wine is a perfectly competitive market. Wine firms are making zero economic profit. Suppose an increase in income increases the demand for wine. Which the following will occur in the short-run? Firms in the wine industry will make economic profits Firms in the wine industry will receive a higher price for their product Firms in the wine industry will produce and sell more wine All of the above In an increasing-cost industry, the entry of new firms results in which of the following? an increase in input prices an increase in economic profits a decrease in demand a decrease in supply The long-run supply industry supply curve for a constant-cost industry is: vertical horizontal upward sloping downward sloping A firm in a perfectly competitive industry is maximizing profit at an output of 3,000 units per month. Assume its fixed cost increases. To maximize profit, the firm should now: increase output and produce more than 3,000 units per month decrease output and produce less than 3,000 units per month continue to produce 3,000 units per month shut down operations and produce no output Assume that the dairy farm industry is a perfectly competitive constant-cost industry. It is currently in long-run equilibrium and the price of milk is $3.00 per gallon. Assume that the demand for milk increases. How will this affect the price of milk in the short-run and long-run? The price of milk will increase above $3.00 in both the short-run and long-run The price of milk will decrease below $3.00 in both the short-run and long-run The price of milk will increase above $3.00 in the short-run, but fall back to $3.00 in the long-run. The price of milk will decrease below $3.00 in the short-run, but rise back to $3.00 in the long-run.Explanation / Answer
17. c. As it earns zero profit it has no surplus to attract new firms and just being recover the average cost no one is willing to leave. Hence, no firms will enter or leave.
18. d. As demand rises the downwards sloping aggregate demand curve for an industry will shift to right and cut upwards rising aggregate supply curve at right. At the initial price level, demand exceeds supply. So prices rises and hence, demand falls along the demand curve and supply rises along it. New equilibrium sets at higher output and price level. This will lead the industry to earn economic profit. Hence, all the answers are true.
19. a. Since cost is increasing new entrant firms produce at higher input price.
20. b. At any long run equilibrium price equals with avreage cost. Since the latter is fixed price is also fixed. Hence, whatever the amount of quantity production the price is fixed. By joining all such coordinates of price, quantity combinations we get horizontal supply curve.
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