Question

1. The short-run supply curve for a firm in a perfectly competitive industry is:

1. The short-run marginal cost curve that is above minimum average variable cost (which takes into account the fact that the firm should shut down if price falls below average variable cost).
2. The entire average variable cost.
3. The entire short-run marginal cost curve.
4. The entire average total cost curve.

2. Which of the following statements is true regarding short-run and long-run costs? (Assume all cost curves have typical shapes, e.g., average total cost and average variable cost are U-shaped.)
   1. Average fixed cost always falls as output increases.
   2. Economies of scale exist in both the short-run and the long-run.
   3. If a firm is experiencing diseconomies of scale, then the firm’s long-run average cost curve is rising in the range of the firm’s current output level.
   4. All of the above are true.
   5. Both (a) and (c) are tru

3. In December 2017 it was reported that U.S. rice harvests were down sharply due to bad weather, and prices were expected to rise due to tight supplies. The U.S. rice market is competitive. Holding all else constant (e.g., there are no shifts in demand or changes in the price of substitutes or complements), if total revenue earned by rice farmers goes up as a result of the surprisingly low harvest, we can infer that in the current price range:

1. The demand for rice is elastic.
2. The demand for rice is inelastic.
3. The supply of rice is elasti
4. The demand for rice is less elastic than the supply of rice.

4. Which of the following statements about profit maximization and equilibrium in a perfectly competitive market is necessarily true in a long-run equilibrium?

1. Economic profits are positive, as there are barriers to entry which sustain above normal profits.
2. Economic profits are driven to zero by competition, as barriers to entry are nonexistent (or at least very low).
3. Price is above long-run marginal cost.
4. Price is below the minimum of long-run average cost.

Please provide step by step explaination/diagram if needed.

Answer 1

1. The short-run supply curve for a firm in a perfectly competitive industry is:

The short-run marginal cost curve that is above minimum average variable cost (which takes into account the fact that the firm should shut down if price falls below average variable cost).

If a firm is not able to generate an amount of revenue that could cover the average variable cost, then it should it down.

2. Statement a) is correct Average fixed cost always falls as output increases. As the number of units produced is increased the fixed cost will fall as the same amount of cost is used for producing additional units.

Statement b) is correct Economies of scale exist in both the short-run and the long-run. As average cost is present in the short run and in the long run, economies of scale are present as long as producing more units leads to a decrease in average cost.

Statement c) is correct If a firm is experiencing diseconomies of scale, then the firm’s long-run average cost curve is rising in the range of the firm’s current output level. As long as the average cost is declining when production is increased, economies of scale is present in the firm. But when LRAC (Long Run Average Cost) does not fall when there is an increase in production then there is diseconomies of scale, means there is an increase in per-unit cost of production.

All the 3 statements are true.

3. In this case, The demand for rice is inelastic. Because the revenue earned by rice farmers is been increased which shows even though there is an increase in the price of rice, still people are demanding it and are paying a higher price for the same. Their demand for rice is inelastic.

4. The correct statement is Economic profits are driven to zero by competition, as barriers to entry are nonexistent (or at least very low).

In perfect competition, economic profits can be negative, zero or positive in the short run but in the long run, the economic profits are equal to zero.

In the long run, if a firm earns positive economic profits, many other firms will enter the market which will lead to a decrease in equilibrium price, due to which economic profits will fall until it reaches zero.

And if a firm earns negative economic profits, many firms will leave the market will lead to an increase in equilibrium price, due to which economic profits will rise until it reaches zero.

Therefore they earn zero economic profit in the long run.