Reading 18: Perfect Competition LOS d习题精选 2010, technology, permanent, industry

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LOS d: Discuss how a permanent change in demand or changes in technology affect price, output, and economic profit.

In the long-run, after all firms in a perfectly competitive industry have adopted new technology, the:

A) price will equal minimum average total cost.

B) individual firm supply will increase as demand decreases.

C) price will be set where average variable cost is equal to marginal revenue.

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After some firms in an industry adopt a technological change, the existing firms that use the old technology will experience losses and either adopt the technology or exit the industry. Long-run equilibrium with price equal to minimum average total cost for the new technology will be established.

 

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 a CFA study seminar, the following comments were made:

Comment 1: “In the short run, an increase in demand in a perfectly competitive industry will result in negative economic profit for some firms in the industry.”

Comment 2: “In the long run, a permanent increase in demand in a perfectly competitive industry will result in zero economic profit for the firms in the industry.”

With respect to these comments:

A) both are correct.

B) only one is correct.

C) both are incorrect.

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Comment 1 is incorrect because an increase in industry demand will increase equilibrium price and output. At the higher price, firms will earn positive economic profits in the short run because the higher price will exceed average total cost. Over the long run, however, new firms will enter the market to exploit the positive economic profits, causing prices to decline until all firms are again earning zero economic profit.

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If the market demand for a product decreases in a competitive market, then the quantity supplied by an individual firm will:

A) decrease and firms will enter the market in the long run.

B) increase and firms will enter the market in the long run.

C) decrease and firms will exit the market in the long run.

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If the market demand for a product decreases in a competitive market, then the quantity supplied by an individual firm will decrease and firms will exit the market in the long run because the price will be less than average total costs.

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 technology that all of the firms in a perfectly competitive industry are using in their production process has been banned by new legislation. What will most likely be the effect if these firms stop using this technology?

A) Firms will adopt a different technology that reduces their costs of production.

B) The quantity that the industry will supply at a given price will be reduced.

C) Profit will no longer be maximized at the level of output where marginal cost is equal to the market price.

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If all the firms in a competitive industry have adopted a technology for production, it is presumably the technology that minimizes their production costs . If that technology is outlawed, firms will have to revert to the second-best technology, which will increase their costs of production. This is represented by a shift to the left in the industry supply curve. At each price level, the quantity supplied will be less than before.

Just as a technological improvement will cause firms that adopt it early to earn economic profits that attract new entrants to the industry, prohibition of the cost-minimizing technology will cause economic losses and typically force some firms to exit the industry. Under perfect competition, profit is always maximized at the level of output where marginal cost equals the market price. The state of technology is one factor that determines the level of output at which this occurs.

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Which of the following is the most likely result of a technological improvement in a perfectly competitive industry?

A) The industry supply curve shifts to the right.

B) The costs for individual firms increase.

C) Individual firms’ supply curves shift to the left.

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When individual firms implement technological change, their costs decline and their supply (cost) curve shifts to the right. At the lower costs, firms are willing to supply a given quantity at a reduced price. The lower cost structure for the individual firms shifts the industry supply curve to the right.

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If the market demand for a product increases in a competitive market, then in the short run the quantity supplied by an individual firm will:

A) increase and the firm will generate economic profits.

B) decrease and the firm will generate economic profits.

C) increase and the firm will generate economic losses.

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If the market demand for a product increases in a competitive market, then both price and quantity supplied by an individual firm will increase and the firm will generate economic profits in the short run because price will be greater than average total costs.