Question

1. in the short run a decline in demand in a perfectly competitive industry will NOT result in:

a. A decline in each firm's profit maximizing quantity

b. A decrease in equilibrium price

c. economic losses for some or all firms in the industry

d. A decline in the equilibrium market quantity

e. A decline in the number of firms in the industry

2. unlike a perfectly competitive firm a monopolistically competitive firm:

a. Cannot earn positive economic profit even in the short run

b. does not have the same marginal revenue at every output level

c. Faces a perfectly inelastic demand curve

d. can earn positive economic profit in the short run and in the long run

3. The Lorenz curve for the United States economy has _______

a. conciced with the line of perfect equality in recent years

b. become a vertical line in recent years

c. shifted toward the line of perfect equality over the years

d. become a horizontal line in recent years

e. shifted further away from the line of equal distribution over the years

Answer 1

1. As shown in the diagram below, a decline in demand in a perfectly competitive industry results

-- a decline in each form's profit maximizing quantity (for the representative firm, the profit maximizing quantity decreases from q* to q1.

-- a decline in equilibrium price from p* to p1.

-- economic losses for some or all firms (for the representative firm, it has resulted in economic loss)

-- a decline in equilibrium merket quantity from Q* to Q1.

However, a decline in the number of firms in the industry happens in the longrun if the firms will not be able to cover at least the average variable cost. Hence, the answer should be (e) A decline in the number of firms in the industry.

(2) A monopolistically perfect competitive firm faces a downward sloping demand curve and hence the marginal revenue curve is also downward sloping. Hence, it may not face a perfect inelastic demand curve. It may earn economic profit or loss in the shortrun. However, in the long run, it will not be able to earn economic profit as it might attract new entrants and subsequently, price = AC and hence earns zero profit in the longrun. Hence, the correct answer should be (b) does not have the same marginal revenue at every output level.

(3) The Lorenz curve for the United States economy has (e) shifted further away from the line of equal distribution over the years as shown in the diagram below.

As observed, the Lorenze curve in 1980 was closer to the perfect equality line as compared to the Lorenze curve in 2011. In other words, income inequality has increased in U.S. over the years.