Question

What will happen in the long run if companies are losing money in the short run?

a. Companies will leave the marketplace, the market supply will shift to the left, and the price will rise until there is zero economic profit for the remaining companies.

b. Companies will stay in the marketplace, the market supply and demand will be unaffected, and quantity supplied will drop.

c. Companies will leave the marketplace, the market demand will decrease, and the price will increase until there is positive normal profit.

d. Companies will enter the marketplace, the market supply will increase, and the price will rise until there is zero economic profit Suppose input prices for a perfectly competitive industry remain constant as the output of the industry expands. What will the industry supply curve look like in the long run? a. It will have a positive slope. b. It will have a negative slope. c. It will be horizontal. d. It will be perfectly vertical. What kind of efficiency is achieved if P = MR = MC ≠ the minimum ATC? a. productive efficiency b. allocative efficiency c. neither productive nor allocative efficient d. both productive and allocative efficient Which of the following is true regarding the long-run effect of a decrease in market demand in a constant-cost industry? a. The price will remain the same, but the number of firms will decrease. b. The price will fall, and the number of firms will decrease. c. The price will increase, but the number of firms will decrease. d. The price will remain the same, but the number of firms will increase.

Answer 1

1.Option A

When firms are incurring short run losses there is no profit to be made, so firms in the long run will exit the industry. This will cause the short run supply curve to shift to the left.

2.Option C

A horizontal supply curve means that the supply in the market is perfectly price elastic . A nominal or negligible change in the price brings about a lot of change in the supply.

3.Option B

Allocative Efficiency occurs when the firm is producing so that P = MC. The reason is that allocative efficiency is achieved when MB = MC but since MB = P also, we say that P = MC. This holds only true when there are no externalities. Productive efficiency occurs when production takes place at the lowest possible cost, so when production occurs at minimum ATC. This means that all resources are used economically and the least amount of resources are used and not wasted.

4. Option A

For a constant-cost industry the shift matches the shift of the demand curve. As new firms enter the industry, they pay the same resource prices and incur the same higher production cost as existing firms. With decrease in demand, price will remain same but firms will exit the industry.