6) Assume that the LCD and plasma TV sets industry is perfectly competitive. Sup

Question

6) Assume that the LCD and plasma TV sets industry is perfectly competitive. Suppose a producer develops a
successful innovation that enables it to lower its cost of production. What happens in the short run and the long run?
A) Initially, the firm will be able to increase its profit significantly, but in the long run its profits will still be greater
than zero but lower than its short run profits because other firms would also innovate.
B) The firm will probably incur losses temporarily because of the high cost of the innovation, but in the long run it
will start earning positive profits.
C) The firm will be able to increase its profits temporarily, but in the long run its profits will be eliminated as other
firms copy the innovation.
D) This firm will be able to earn above normal profits indefinitely if it obtains a patent for its innovation.

7) Assume that the medical screening industry is perfectly competitive. Consider a typical firm that is making
short-run losses. Suppose the medical screening industry runs an effective advertising campaign which convinces a
large number of people that yearly CT scans are critical for good health. How will this affect a typical firm that
remains in the industry?
A) The firm's supply curve shifts right and its marginal revenue curve shifts upwards as the market price rises and
ultimately the firm starts making profits.
B) The firm's marginal revenue curve and average cost curve shift upwards in response to the increase in market
price and advertising expenditure. The firm increases output until it starts breaking even.
C) The marginal revenue curve shifts upwards, the firm's output increases along its marginal cost curve, it expands
production and eventually starts making profits.
D) The marginal revenue curve shifts upwards, the firm's output increases along its marginal cost curve, it expands
production until it breaks even.

14) If a typical firm in a perfectly competitive industry is incurring losses, then
A) all firms will continue to lose money.
B) some firms will exit in the long run, causing market supply to decrease and market price to rise increasing
profits for the remaining firms.
C) some firms will exit in the long run, causing market supply to decrease and market price to fall increasing losses
for the remaining firms.
D) some firms will enter in the long run, causing market supply to increase and market price to rise increasing
profit for all firms.



15) Economic costs of production differ from accounting costs in that
A) economic costs include expenditures for hired resources while accounting costs do not.
B) economic costs add the opportunity costs of a firm using its own resources while accounting costs do not.
C) accounting costs include expenditures for hired resources while economic costs do not.
D) accounting costs are always larger than economic cost.

Explanation / Answer

6) Assume that the LCD and plasma TV sets industry is perfectly competitive. Suppose a producer develops a successful innovation that enables it to lower its cost of production. What happens in the short run and the long run? A) Initially, the firm will be able to increase its profit significantly, but in the long run its profits will still be greater than zero but lower than its short run profits because other firms would also innovate. 7) Assume that the medical screening industry is perfectly competitive. Consider a typical firm that is making short-run losses. Suppose the medical screening industry runs an effective advertising campaign which convinces a large number of people that yearly CT scans are critical for good health. How will this affect a typical firm that remains in the industry? B) The firm's marginal revenue curve and average cost curve shift upwards in response to the increase in market price and advertising expenditure. The firm increases output until it starts breaking even. 14) If a typical firm in a perfectly competitive industry is incurring losses, then C) some firms will exit in the long run, causing market supply to decrease and market price to fall inc 15) Economic costs of production differ from accounting costs in that D) accounting costs are always larger than economic cost.

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