Question

One application of our study of competitive markets is the decision of whether or not some government services (such as garbage collection or prison operation) should be privatized. According to our discussion, the main argument for privatizing these services is that this might improve:

a. Profits

b. Oversight of operations

c. Efficiency

d. Wages of employees providing these services

2. When firms in a competitive market are experiencing positive economic profits, we expect some firms to ________ the market, which will cause the price in the market to _________ .

a. Exit, increase

b. Exit, decrease

c. Enter, increase

d. Enter, decrease

3. Which of the following best describes the decision-making of firms in a perfectly competitive market?

a. Firms primarily have to decide what price to charge

b. Firms primarily have to decide how much quantity to produce

c. Firms have to decide what price to charge and what quantity to produce simultaneously

d. Firms primarily have to decide what two food items can be combined to create the next great “super food” (such as the quesarito, turducken, or hot dog pizza).

Answer 1

Answer 1.(c) .Efficiency.

The main argument for privatizing the government services like garbage collection or prison operation will improve the efficiency. When firms are privately owned there is a greater incentive for profit so that increases efficiency.In the private sector managers are accountable to share holders .If they want to make profit they will make the production efficient so that the cost of production is minimum and profit is good.

Answer 2.(d).Enter ,Decrease.

When firms in a competitive market are experiencing positive economic profit,some new firms will enter the market due to the expectation positive economic profit, which will increase the supply of goods in the market.The increased supply will make the price of the commodity decrease.

Answer 3.(b). Firms primarily have to decide how much quantity to produce.

Perfectly competitive market is a market structure in which there are a large number of firms producing homogeneous product so that no individual firm can influence the price of the commodity.Price is determined by the industry ie. by all firms taken together by the forces of demand and supply.A single firm has no control over the product price.A firm can take only decision about the amount of output to produce at the price in the market.