statements below refer to perfectly competitive markets in long-run competitive
ID: 1193015 • Letter: S
Question
statements below refer to perfectly competitive markets in long-run competitive equilibrium. Indicate whether each statement is true or false, by dragging and dropping the true or false labels to the appropriate boxes. In a long-run competitive equilibrium, the typical firm will break even, earning zero economic profits. Suppose a perfectly competitive, constant-cost, industry is in a long-run equilibrium. If there is an increase in market demand, then we would expect that firms will exit the industry. Suppose a perfectly competitive, constant-cost, industry is in a long-run equilibrium. If there is a decrease in market demand that leads to an economic loss for the average firm, we would expect the market price to first decrease, and then increase. In a long-run competitive equilibrium, the typical firm is maximizing its profits by producing a level of output where the marginal revenue exceeds the marginal cost by the greatest amount possible. Productive efficiency occurs when a good or service is produced at the lowest possible cost. Allocative efficiency refers to the level of output where the marginal revenue is maximized.Explanation / Answer
1)TRUE , in the long run a firm in a perfect competitive market earns only normal profit ,it breaks even and doesnt earn any economic profit.In a perfect competitive market structure , in the long run all firms have equal market share and they charge prices equal to the Marginal costs.As they posses no market power they have to charge the given prices .Under this situation they cant earn any economic profits in the long run.
2)FALSE, given the firm is in long run equilibrium , when the demand increases in a constant cost industry, prices temporarily rises in the short run.Thus existing firms earn higher profits.This attracts new firms in the market such that the the short run supply curve shifts rightwards till market prices return at the original level.Thus under long run equilibrium when demand increases new firms enter the industry in short run not exit.
3)TRUE, Given the situation of long run equilibrium in the industry,when market demand for the product falls price temporarily falls as market demand shifts leftwards.Thus some firms would exit the industry such that the short run supply curve shifts leftwards.A further reduction in supply would raise the prices until it returns to its original level and the long run supply curve is a horizontal straight line.
4)FALSE, in long run equilibrium situation a firm maximises profits by equating MARGINAL REVENUE with MARGINAL COST.That is he consumes a good upto the point where additional revenue generated by selling it is equal to the additional cost incurred by producing it.
5)TRUE, productive efficiency is attained when the output is produced with minimum resources possible.That is at minimum cost possible.All points on the PPF are productive efficient as all units on PPF are prodduced at minimum costs.
6)False, Allocative efficiency refers to the output level where benefit to a consumer from consuming an additional quantity is equal to the costs incurred by firms on each additional unit.That is MARGINAL BENEFIT = MARGINAL COST.At this level PRICE = MC.There is no dead weight loss associated with this level of output and total surplus in the society is maximized.
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