Question

In: Economics

2. If occupational safety laws were relaxed so that price-searcher firms no longer had to take...

2. If occupational safety laws were relaxed so that price-searcher firms no longer had to take expensive steps to meet regulatory requirements, which of the following statements is correct? (Note: More than one answer is correct, list all correct answers).

a. the quantity demanded for products of this industry will increase.

b. the market price of the close substitute products for this industry will decrease.

c. the firms in the industry will make long-run economic profits.

d. competition will force producers in this industry to pass the lower production costs on to consumers in the long run in the form of lower price.

e. the market price of the close substitute products for this industry will decrease.

3. Clarence Brown sells corn in a price-taker market. With regard to Brown's price, output, and profits, which of the following is true? (Note: More than one answer is correct, list all correct answers).

a. Brown will constantly attempt to lower the cost of production to try to make short-run profits.

b. Since the price of his product is dictated by the market, Brown will have strong incentives to control per-unit costs.

c. Since the price of his product is dictated by the market, Brown has no production decisions to make.

d. It would be senseless for Brown to try to increase sales by lowering the price of his product because his entire output can always be sold at the dictated market price.

e. Brown may be able to make positive economic profits in the short-run, but not in the long-run.   

4. When the conditions in a competitive price-taker market are such that firms are unable to cover their production costs (more than one answer is correct, list all correct answers),

a. the firms will suffer short-run economic losses.

b. some firms will go out of business since consumers will not pay prices that enable firms to cover their production costs.   

c. some firms will exit the industry, and market price will rise until the remaining firms can earn the normal rate of return.   

d. resource prices will increase, output prices will increase, competition will decline, and eventually the firms in the industry will earn positive economic profits.

e. resource prices will decrease, output prices will increase, competition will decline, and eventually firms in the industry will earn zero economic profits.

Solutions

Expert Solution

Answer 2 :-

Whenever a firm can get away with compulsory safety requirements.

This will eventually lead to decrease in the fixed cost of the firm .

With the decrease in the fixed cost of the firm following statements are true :-

a) The quantity demanded for this product will increase .

Reason - a fall in cost will lead to a fall in price of the good and there is an inverse relationship between price and demand of the good .

b) The market price for close substitutes will decrease.

Reason - In long run, to survive the competition the substitutes will also tend to reduce the price to retain their customers.

d) The producers will be forced to shift the lower production costs in the form of low prices .

Answer 3 :-

a) Brown will constantly try to lower it's cost of production to make short run profits .

b) Since the price of the product is dictated by the market there will be strong incentive to control per unit cost .

e) Brown will be able to make positive profits in short run , not in long run .

Reason :-

In short run by lowering the cost of production will increase the profits as the firm is a price taker and even after lowering the cost , it will still continue to sell on the prevalent prices .

However in long run all other firms will follow the same technique of lowering the cost of production and the industry price will readjust itself , lowering the profit to the previous figure .

Answer 4 :-

a) The firms will earn short run economic losses

b) Some firms will go out of the business since consumer will not pay prices to cover their cost of production.

c) Some firms will exit the industry and the market price will until the firms start to earn a normal rate of return.

e) Resource price will decrease, output price will increase, competition will decline and eventually firms will earn zero economic profit .

Reason - The exit of the firms will lower the supply of the product thus leading to the price rise of the products and improving the conditions of the firms who were break-even .


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