Q1.Martha is one producer in the perfectly competitive jelly industry. Last year
ID: 1154220 • Letter: Q
Question
Q1.Martha is one producer in the perfectly competitive jelly industry. Last year, Martha and all of her competitors found themselves earning economic profits. If there is free entry and exit, what do you expect to happen to the number of suppliers in the industry and the price of jelly?
A.The number of suppliers will increase, and the price of jelly will fall.
B.The number of suppliers will decrease, and the price of jelly will fall.
C.The number of suppliers will decrease, and the price of jelly will increase.
D.The number of suppliers will increase, and the price of jelly will increase.
Q2.Martha is one producer in the perfectly competitive jelly industry. Last year, Martha and all of her competitors found themselves earning economic profits. If there is free entry and exit, what do you expect will happen to the amount of output Martha will produce and the amount of profit she will have?
A.Martha's output will increase but her profits will decrease.
B.Martha's output will decrease, but her profits will increase.
C.Martha's output and profits will both decrease.
D.Martha's output and profits will both increase.
Q2.Martha is one producer in the perfectly competitive jelly industry. Last year, Martha and all of her competitors found themselves earning economic profits. If there is free entry and exit, what do you expect will happen to the amount of output Martha will produce and the amount of profit she will have?
A.Martha's output will increase but her profits will decrease.
B.Martha's output will decrease, but her profits will increase.
C.Martha's output and profits will both decrease.
D.Martha's output and profits will both increase.
Explanation / Answer
Q1. Correct ans is A
The number of suppliers will increase, and price of jelly will fall.
It is so because the firms in the market (perfect competitive market) are earning economic profit and due to free entry and exit, the new suppliers will enter in the market to earn the economic profit. But as the supplier increases it result in increase in the supply or jelly. And due to increase in supply of jelly there will be competition among sellers to sell jelly so due to competition among seller the prices of jelly will fall.
So option a) is correct.
Other options are incorrect
Option B is incorrect because supplier will increase not decrease.
Option C is incorrect because suppliers will increase not decrease and price will fall not increase.
Option D is incorrect because prices will fall not increase.
2. Correct ans is A-
Martha's output will increase but her profits will decrease. It is so because as the firms are earning economic profit so as Martha's. And as Martha's is in a perfect competition market she could only increase her profit by rising output because prices are given by the industry (she could not change the price) so her output will increase but her profit will decrease because of free entry and exit, new suppliers will enter will result in increase in supply of jelly and as supply of jelly is increasing its price will fall. So as price falls profit will also fall.
So option a) is correct.
Other options are incorrect
Option B is incorrect because Martha's output will increase and her profit will decrease.
Option C is oncincorr because only profit will decrease not both profit and output.
Option D is incorrect because only output will increase not profit.
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