Question

If firms in a perfectly competitive industry are making zero economic profit, then

a	some of those firms will leave the industry because firms cannot persistently go without making economic profit.

b	new firms will enter the industry, because the new entrants would be ensured of doing as well as in their best foregone alternative.

c	there is no incentive for either entry or exit.

d	some of the firms will temporarily shut down.

e

The supply curve shifts to the left as each firm will reduce its output thereby increasing price

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11. Suppose that newspaper companies are now required to use recycled paper, which is more expensive than new paper. Which of the following is most likely to result if the newspaper industry is highly competitive?

a	The firms' costs rise, resulting in positive economic profit in the short run and, hence, the industry supply curve shifts rightward in the long run.

b	The firms' costs rise, resulting in economic losses in the short run and, hence, the industry supply curve shifts rightward in the long run.

c	The firms' costs rise, resulting in economic losses in the short run and, hence, the industry supply curve shifts leftward in the long run.

d	The industry supply curve shifts leftward in the short run, causing permanent long-run economic losses.

e	The firms' costs rise, resulting in economic losses in the short run and, hence, the industry supply curve shifts leftward in the long run and there will be permanent economic losses in the long-run.

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12. Today, firms in a perfectly competitive market are making an economic profit. In the long run, firms will ________ the market until all firms in the market are ________.

a	exit; covering only their total fixed costs

b	enter; making zero economic profit

c	exit; producing at the minimum point on their long-run average cost curve

d	enter; making zero normal profit

e

exit; cover only their variable costs

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Suppose firms in a perfectly competitive industry are making economic profits. As a result

I. new firms enter the industry.

II. the market price falls.

III. the economic profits of the existing firms decrease.

a	I, II and III

b

I and II

c	II and III

d

I and III

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14. Rapido, the shoe company, is so popular that it has monopoly power. It’s selling 20 million shoes per year. Rapido’s marketing experts tell the CEO of Rapido that if it increases prices by 20%, it would sell 5% fewer shoes and hence profits would rise. If the expert is correct, at its current output,

a

MC=MR

b

MC>MR

c

MC<MR

d

P=MR=MC

e

P=MR>MC

Answer 1

Answer.)

Q10.) c.) there is no incentive for either entry or exit.

Perfectly competitive industry is characterised as a normal profit industry.

Q11.) c.) The firms' costs rise, resulting in economic losses in the short run and, hence, the industry supply curve shifts leftward in the long run.

Q12.) b.) enter; making zero economic profit

Presence of economic profits attract new firms due to no barriers to entry, this ensures only normal profits in long run.

Q13.) a.) I, II and III

Q14.) b.) MC>MR

If the expert is correct and a price decrease increases profits, MR must be greater than MC (MR > MC) at the current level of output.