Please help me check the answers! In a perfectly competitive market, the process

Question

Please help me check the answers!

In a perfectly competitive market, the process of entry and exit will end when (i) accounting profits are zero, (ii) economic profits are zero, (iii) price equals minimum marginal cost.(iv) price equals minimum average total cost. (ii) and (iv) only (i) and (ii) only (i), (ii), (iii), and (iv) (ii) and (iii) only Which of these assumptions is often realistic for a firm in the short run? The firm can vary both the size of its factory and the number of workers it employs. The firm can vary the number of workers it employs but not the size of its factory. The firm can vary the size of its factory but not the number of workers it employs. The firm can vary neither the size of its factory nor the number of workers it employs. Regarding the provision of a public utility like water, a few large firms can deliver the water to households most efficiently. many small firms can deliver the water to households most efficiently. a state-owned firm can deliver the water to households most efficiently. one firm can deliver the water to households most efficiently.

Explanation / Answer

Q3) Answer = A

Explanation:

In a perfectly competitive market each firms earn a normal profit and economic profit is zero, Where MC = MR = P and ATC is at its minimum

All firms will maximize (economic) profit by producing and selling the quantity for which marginal revenue equals to marginal cost. For a firm in perfectly competitive market this is same as producing and selling quantity when MC = P = MR

In perfectly competitive market, firms will not earn economic profits for any significant period of time. The assumptions that new firms (with average and marginal cost curves identical to those of existing firms) will enter the industry to earn economic profits (when economic profits are > 0), increasing market supply and eventually reducing market price so that it is equal to firms Average Total Cost (ATC).

In equilibrium, each firm is producing the quantity for which P = MR = MC = ATC, such that each firm earns economic profits and producing quantities for which ATC is at minimum (where ATC = MC)(Economic Loss = MR<MC, Economic Profit = MR >MC).

Hence the long –run equilibrium output level for perfectly competitive firm is where MR = MC = ATC, where ATC is at a minimum. At this output, economic profit is zero and only a normal return is realized, which is where the process of entry and exit will end.

Q4) Answer = B

Explanation:

In Economics we define short run for a firm as the time period over which some of the factors of production are fixed. More often we assume that capital (i.e investment in land, machine, new factory) is fixed in the short run, so that the firm cannot change its scale of operations (plant and machinery) over the short run.

Now under perfect competition, because some costs are fixed, it will be better for a firm to continue production as long as its average revenue > average variable cost. Hence as long as the Total Revenue is greater than Total Variable Cost, at least some of the firms costs are covered by continuing production and selling its products.

However in long run all costs are variable, so the firm can avoid (short-run) fixed cost (i.e. letting leases expire and sell plant and equipment) by shutting down. For this reason it is assumed in short run to have constant fixed cost and not variable cost (labour) allowing to understand the marginal product of each increase unit of labour, keeping capital (plan and machinery) constant. (where production function Q = f(K,L), where K = Capital and L = Labour).

Q5) Answer = C

Explanation:

Now this question revolves around the “free rider” problem. Public goods are goods and services that are consumed by people regardless of whether or not they pay for them.

For any public good and common resources such as water, the problem of “free rider” persists. Competitive market will produce less or more than the efficient quantity of public goods because each person can benefit from public goods without paying for their production.

A common example of such resource is ocean fishery. Each fisherman will fish in the ocean at no cost and will have little incentive to maintain or improve the resource. Since individuals do not have the incentive to fish at the economically efficient (i.e. sustainable) level, over fishing is the common result.

Therefore if distribution of public good be left for the market forces, general out come is over use of common resources and the production of related goods and services is greater than the efficient amount.

Hope this helps!

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