Question

Briefly explain why you think the following statements are true, false, or uncertain.

Your grade will depend largely on the quality of your explanations.

1. In the very short run price is absolutely fixed.
2. Firms in long‑run equilibrium in a perfectly competitive industry will produce at the low points of their average variable cost curves because firms maximize profits and free entry implies that maximum profits will be zero.
3. If a 1 percent increase in price leads to a 0.7 percent increase in quantity supplied, the short‑run supply curve is elastic.
4. Under perfect competition, if an industry is characterized by positive economic profits in the short run, we would expect to find that firms will enter the market in the long run and the short-run supply curve will shift outward.
5. The market demand curve for any good is the horizontal summation of individuals' demand curves.

Answer 1

a. Uncertain. In the very short run price can also change when markets are free and there is no government intervention. Thus, it cannot be stated with certainity whether prices are fixed or not.

b. False. In the long run, firms in a perfeclty competitive industry will produce at the low points of their average total cost curve rather than average variable cost curve of the firm.

c. False. It is inelastic because percentage change in quantity supplied is less than percentage change in price.Thus, supply is relatively inelastic.

d. True.Due to free entry and exit of firms in the industry in perfect competition, the firms will enter the industry and this will shift the short run supply curve of the industry rightwards.

e. False. The market supply curve is horizontal summation of individual firm's supply curve rather than market demand curve.

Answer 2

a)

True statement:

Generally, the price level remains fixed over the short run. Price takes time to respond or change accordingly. Thus it is the right statement.

b)

Answer: False statement.

Over the long run, the firm operates at the minimum point of ATC not the AVC. ATC includes such costs which are avoidable.

c)

False statement.

The change in the supply is less than one percent. thus supply will be inelastic not elastic.

d)

True statement.

The positive profit will invite the new firm entry,so there will be rise in the short run supply. The long run supply is derived from the short-run supply curves.

e)

True statement.

The market demand curve is horizontal summation of invidual demand curves

answered by: bobii