Question

QUESTION 3

Entry into a competitive market will continue until

1. economic profits are zero.

2. Accounting profits are zero.

3. 1. and 2. are true

4. when accounting losses are zero.

QUESTION 4

The kinked demand curve is based on the idea that

1. you will follow my price increase but not my price cut.

2. you will follow my price cut but not my price increase.

3. you will follow all price changes I might initiate.

4. you will not follow my behavior at all.

QUESTION 5

Profits are maximized when

1. added costs are equal to added revenue.

2. average costs equal average revenue.

3. costs equal revenue.

4. economic profits are zero.

Answer 1

3. The correct answer is: a)

Reason: In a competitive market, the long run equilibrium is achieved(when entry/exit of new firms stops) when the economic profits are zero or in other words, all the existing firms normal profit.

3. The correct answer is: b)

Reason: This happens in case of oligopolistic markets where the firms readily follow price cuts but react slowly to price increase thus generating a kinked demand curve.

5. The correct answer is: a)

Reason:added cost are called marginal cost and addded revenue are called marginal revenue. Profits are maximised where MC = MR.

Thanks!