Question

Consider the following statements.

I. In the long run, every firm in a perfectly competitive industry
will make an economic profit of zero.
II. In the short run, every firm in a perfectly competitive industry
will make the same economic profit.
III. In the long run, firms in perfectly competitive industries
must be productively efficient.

I and II are true; III is false.
I and III are true; II is false.
I and III are false; II is true.
All three statements are false.
I is true; II and III are false

With a kinked demand curve,
consumers are not assumed to be price sensitive.
because rivals' reactions are easy to predict, it is easy for firms to change price to seek competitive advantage.
firms are not assumed to be interdependent in their decision making.
possible negative consequences exist for both raising and lowering prices.
firms have tremendous incentives to experiment with price changes.

Answer 1

1) The term economic profit means the situation where the opportunity cost is equal to the production cost. That is the most efficient point in the economy i.e. the firm has to give up other option by the same amount of what he is using in production. In the perfectly competitive market firm have a zero economic profit in the long run.

Productively efficient means that the firm has to give up one product to produce one product of other good i.e. we can't make an extra of one product without giving up an extra of other product. Firms are productively efficient in the long run in the perfectly competitive market.

The answer to this question is I and III are true statement II is false (firm earn different amount of profit in the short run.)

2) "Possible negative consequences exist for both raising and lowering prices "

A kinked demand curve means that if the firm increases price he will lose the market share but if they reduce the price other firms in the market will follow, which will reduce the overall profit of the firm.