1. Suppose a perfectly competitive firm is in long-run equilibrium and there is
ID: 2439873 • Letter: 1
Question
1.
Suppose a perfectly competitive firm is in long-run equilibrium and there is a decrease in demand. Suppose also that the firm operates in an industry in which the prices of productive inputs vary with the level of output, increasing when output increases and decreasing when output decreases. Which of the following will occur at the new long-run equilibrium?
A) Price will be lower than it was at the initial long-run equilibrium.
B) Price will be the same as it was at the initial long-run equilibrium.
C) Price will be higher than it was at the initial long-run equilibrium.
D) The industry supply function will shift to the right.
2.
Assume the elasticity of supply for a particular good has been estimated to equal 1.8. In this case, a 10 percent increase in product price would cause the quantity supplied to:
A) decrease by 1.8 percent.
B) increase by 1.8 percent.
C) decrease by 18 percent.
D) increase by 18 percent
3.
Which of the following statements regarding the creation of brand loyalty to create and maintain market power is false?
A) Brand loyalty efforts often focus on creating perceived, as opposed to real, differences among products.
B) Brand loyalty can be enhanced by improving the level of service associated with a particular product.
C) One study showed that, in the case of competing beers, brand loyalty has relatively little to do with price.
D) Brand loyalty is determined primarily by real differences in competing products.
Explanation / Answer
1> A) Price will be lower than it was at the initial long-run equilibrium.
It is so because the demand decreased as well as the marginal cost of supply is low as per the hypothesis given in the question, so price should fall.
2> D) increase by 18 percent
Since it is 1.8, the 10% has to be multiplied with 1.8 to get the figure 18%.
3> D) Brand loyalty is determined primarily by real differences in competing products.
It is often the perceived differences rather than the actual differences.
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