Download Long Run Equilibrium I. Quiz A. Multiple Choice. Choose the best

Long Run Equilibrium
I. Quiz
A. Multiple Choice. Choose the best answer.
1. When Swanky Inc. makes exactly zero economic profit, Sidney, the owner,
A. Is taking a loss.
B. Will shut down.
C. Is receiving compensation for the time a capital that he has supplied.
D. Will boost output.
2. In competition, the difference between short run and long run is
A. Entry and exit of firms.
B. The quantity of output varies.
C. Prices are fixed.
D. None of the above.
3. In the long run,
A. Only the scale of plant is fixed.
B. All inputs are variable.
C. All inputs are fixed.
D. A firm must earn economic rent.
4. If profits are being made by firms in a competitive industry, new firms will enter. This will
shift the industry
A. demand curve to the left, causing market price to fall.
B. demand curve to the right, causing market price to rise.
C. supply curve to the left, causing market price to rise.
D. supply curve to the right, causing market price to fall.
5. Economic profit is
A. the difference between revenue and cost when all opportunity costs are taken into account.
B. the difference between revenue and cost excluding all opportunity costs.
C. zero when opportunity costs are included.
D. zero when only explicit costs are included.
6. When Swanky Inc. makes zero economic profit, then Sidney, its owner, is
A. going to go out of business in the long run.
B. taking a loss in the short run.
C. making an income equal to his opportunity cost.
D. suffering economic hardship.
7. In the long run, perfectly competitive firms earn zero economic profit. This result is due
mainly to the assumption of
A. market demand is perfectly elastic.
B. firms are price takers.
C. unrestricted entry and exit.
D. few buyers and sellers.
8. For a perfectly competitive industry, a permanent increase in demand will cause the long run
price to
A. be the same as the initial price, but long run economic profits increase.
B. be the same as the initial price because new firms enter the industry.
C. increase compared to the initial price, but long run economic profits will remain zero.
D. be the same as the initial price because the supply curve will shift back to its original
position.
9. Economic profit sends a signal to entrepreneurs by telling them where
A. Products are identical.
B. Normal profits can be found.
C. There are many buyers and many sellers.
D. An above normal profit on their investment can be earned.
10. Economic profit that is not competed away is called
A. Normal profit.
B. Accounting profit.
C. Fixed rent.
D. Economic rent.
11. Invisible hand theory holds that price has
A. A rationing function.
B. An allocative function.
C. Both A and B.
D. Neither A or B.
12. Adam Smith’s Theory of the Invisible Hand results from
A. Markets.
B. People acting out of self interest.
C. Unintended consequences.
D. All of the above.
13. Economic Rents are created by
A. Parents.
B. Barriers to Entry.
C. Rising Marginal Costs.
D. The Law of Diminishing Marginal Returns.
14. If advances in computer animation make movies cost less to produce, then in the short run
the _____ curve for movies will shift _____.
A. Supply, in.
B. Supply, out.
C. Demand, in.
D. Demand, out.
Use Sam’s information for questions 15, 16, and 17. Last year, Sam the hair stylist made
$145,000 in revenue, but spent $100,000 on rent, supplies, utilities, and other accounting costs.
Last year, Sam could have worked for Cost Cutters last instead and made $37,000 in salary and
tips.
15. Sam’s accounting profit was
A. $8,000.
B. $37,000.
C. $45,000.
D. $145,000.
16. Sam’s economic profit was
A. $8,000.
B. $37,000.
C. $45,000.
D. $145,000.
17. Sam’s normal profit was
A. $8,000.
B. $37,000.
C. $45,000.
D. $145,000.
18. If no one was allowed to open or expand a hair salon, then Sam’s economic rent would be
A. $8,000.
B. $37,000.
C. $45,000.
D. $145,000.
19. Firms in a competitive industry with free entry and exit can expect long run economic
profits that are
A. Positive.
B. Negative.
C. Increasing.
D. Zero.
20. For a perfectly competitive industry, a permanent decrease in demand will cause the long
run price to
A. Be the same as the initial price, but long run economic profits decrease.
B. Be the same as the initial price because firms leave the industry.
C. Decrease compared to the initial price, but long run economic profits will remain zero.
D. Be the same as the initial price because the supply curve will shift back to its original
position.
B. Multiple Choice Answers.
1
C
11
C
2
A
12
D
3
B
13
B
4
D
14
B
5
A
15
C
6
C
16
A
7
C
17
B
8
B
18
A
9
B
19
D
10
D
20
B
C. Short Answer Questions
1. What is Adam Smith’s invisible hand? Explain the allocative and rationing functions and
how the invisible hand achieves them.
2. In an competitive industry, there are thirty (30) identical companies producing peaches.
Table 1. Peach cost structure for each company.
Units 0
Produ
ced
Total 28
Cost
Margi
nal
Cost
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
29
30
32
35
39
44
50
57
65
74
84
95
107
120
134
149
165
182
200
219
1
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
Table 2 reports the amount of peaches demanded by the entire market.
Price
Quantity
Demanded
$12.25
$10.38
$8.50
$6.63
$4.75
$2.88
120
150
180
210
240
270
$10.38
$8.50
$6.63
$4.75
$2.88
A. Fill in Table 3.
Price
Quantity
Supplied by
Each
Company
Total Quantity
Supplied by
all thirty
firms.
$12.25
B. With no entry or exit, what will be the equilibrium
1. Price? $__________
2. Quantity Demanded? _________
3. Quantity Supplied by the entire market? __________
4. Quantity Supplied by each firm? __________
5. Marginal revenue faced by each firm? $__________
6. The profit or loss earned by each firm? $__________
C. Will companies want to enter or leave this market assuming the fixed cost of $28 already
includes the normal profit for the owner? __________
D. If entry and exit is allowed and the quantity demanded at $7.13 is 200, then what will be the
equilibrium
1. Number of companies? __________
2. The economic profit earned by each firm? _________
3. In the ____________ run, the firm can switch industries and change plant size.
_____________ profit and loss serves as the signal for the movement and reallocation of
resources. In contrast, _______________ profit just covers the opportunity cost of the business
owner. Only when there is ____________ profit or loss is there no tendency for a company to
____________ or ____________ industries. This situation of no tendency to change is also
called ____________.
4. (4 points) Jan runs a shoe-shine stand. Last year Jan made $32,000 in revenue and spent
$12,000 on rent, equipment and other expenses. Jan knows he could always become a cook and
earn $22,000 a year.
1. What was Jan’s accounting profit? _________.
2. What was Jan’s economic profit? _________.
3. What was Jan’s normal profit? _________.
4. Should Jan become a cook?__________.
6. If you have a competitive market comprised of identical firms, how does entry and exit create
a long run equilibrium?
D. ANSWERS TO SHORT ANSWER
QUESTIONS
1. What is Adam Smith’s invisible hand? Explain the allocative and rationing functions and
how the invisible hand achieves them..
The invisible hand refers to how market works. By each person pursuing their own self interest
through voluntary trade, the people can do what is good for society.
When producers chase economic profit (producer surplus), they move resources to underserved
industries until economic profits are competed away. Frank and Bernanke call this the
allocative function and it means businesses produce what people want.
When consumer trade to get what each person most wants, then stuff ends up with whomever
values it the most. Consumer surplus is created. Frank and Bernanke call this the rationing
function.
These function are created by competition in a free market.
2. In an competitive industry, there are thirty (30) identical companies producing peaches.
A. Fill in Table 5.
Price
Quantity
Supplied by
Each
Company
Total
Quantity
Supplied by
all thirty
firms.
$12.25
$10.38
$8.50
$6.63
$4.75
$2.88
13
11
9
7
5
3
390
330
270
210
150
90
B. With no entry or exit, what will be the equilibrium
1. Price? $__________6.63
2. Quantity Demanded? _________210
3. Quantity Supplied by the entire market? __________210
4. Quantity Supplied by each firm? __________7
5. Marginal revenue faced by each firm? $__________6.63
6. The profit or loss earned by each firm? $__________-3.57
C. Will companies want to enter or leave this market? __________ LEAVE
D. If entry and exit is allowed and the quantity demanded at $7.13 is 200, then what will be the
equilibrium
1. Number of companies? __________25
2. The profit earned by each firm? _________0
3. In the _long__ run, the firm can switch industries and change plant size. _economic_ profit
and loss serves as the signal for the movement and reallocation of resources. In contrast,
__normal__ profit just covers the opportunity cost of the business owner. Only when there is
_NO___ profit or loss is there no tendency for a company to __enter_ or __exit__ industries.
This situation of no tendency to change is also called __equilibrium_.
4. Jan runs a shoe-shine stand. Last year Jan made $32,000 in revenue and spent $12,000 on
rent, equipment and other expenses. Jan knows he could always become a cook and earn
$22,000 a year.
5.
1. If firms are earning positive economic profits, then new businesses will enter the
industry which will shift the supply curve to the right. The resulting surplus will push
down prices and reduce profits until economic profit is eliminated.
2. If firms are earning negative economic profits (economic losses), then businesses will
exit the industry which will shift the supply curve to the left. The resulting shortage will
push up prices and increase profits until economic profit is eliminated.
3. Long run equilibrium is when economic profits are zero and no one wants to enter or
leave the market.