Question

In: Economics

Farm Fresh, Inc., supplies sweet peas to canneries located throughout the Mississippi River Valley. Like many...

Farm Fresh, Inc., supplies sweet peas to canneries located throughout the Mississippi River

Valley. Like many grain and commodity markets, the market for sweet peas is perfectly

competitive. With $250,000 in fixed costs, the company's total and marginal costs per ton

(Q) are:

TC = $250,000 + $200Q + $0.025Q

2

MC =

Δ

TC/

Δ

Q = $200 + $0.05Q

Indicate whether each of the following statements is true or false, and explain why.

A.

In long-run equilibrium, every firm in a perfectly competitive industry earns zero

profit.

B.

Perfect competition exists in a market when all firms are price takers as opposed to

price makers.

C.

In competitive markets, P > MC at the profit-maximizing output level.

D.

Downward-sloping industry demand curves characterize perfectly competitive

markets.

E.

A firm might show accounting profits in a competitive market but be suffering

economic losses

Solutions

Expert Solution

A. False. In long-run equilibrium, every firm in a perfectly competitive industry earns zero economic profit. For long-term viability, firms in competitive markets must earns normal rate of return on investment.

B.

True. Perfect competition exists in a market when individual customers and individual firms have no influence over price. In such markets, both customers and firms take prices as given.

C.

False. Profit maximization requires that a firm operate at the output level at which marginal revenue and marginal cost are equal. With price constant, average revenue equals marginal revenue. Therefore, maximum profits result when market price is set equal to marginal cost for firms in a perfectly competitive industry

D.

True. Downward sloping demand curves follow from the law of diminishing marginal utility and characterize both competitive markets.

E.

True. Normal profit is defined as the rate of return necessary to retain and attract needed capital investment. Economic profit represents an above-normal rate of return.The firm incurs economic losses whenever it fails to earn a normal profit. A firm might show a small accounting profit but be suffering economic losses because these profits are insufficient to provide an adequate return to the firm's stockholders. In such instances, firms are unable to replace plant and equipment and will exit the industry in the long run

Rahul Sunny answered 1 year ago
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