Question

1. True or False: In a price-taker market, if a business operator produces inefficiently—and the cost of producing the good is maximized—the operator will be able to make at least a normal profit.

2. True or False: When the firms in the industry are just able to cover their cost of production, economic profit is zero. Therefore, if demand falls, causing prices to go down even a little bit, economic profits will be negative in the long run.

Answer 1

1. In a price taker market the efficient outcome occurs because the competition among producers compels them to find the level of output at the lowest cost. Since the producers are unable to change the market price each producer wants to reduce the cost to maximize profit. Inefficient production occurs when a producer chooses to produce at the early portion of the ATC curve where the unit cost and marginal costs are higher. The other producers are producing efficiently with minimum cost. Thus the produce who is operating inefficiently with higher cost will suffer loss.

Answer: False

2. In longrun all firms will earn normal profit or zero economic profit. If the demand falls, the price will decrease and it will results in loss to the firms in shortrun. The loss in shortrun compels some of the firms to quit the industry in longrun and the fall in supply rise the price and the loss disappears.

Answer: False.