Question

ANSWER WITH EXPLANATION PLEASE

A1) The demand will be _______________ if the consumer has _________ substitute goods to choose from  
         A)    more elastic; less  
         B)    more inelastic; more
         C)    more elastic; more
         D)    more inelastic; less

A2) It is easiest for new firms to enter a         
         A)    Perfectly competitive market.
         B)    Duopoly market.
         C)    Oligopoly market.
         D)    Monopoly market.

A3) A perfectly competitive firm
         A)    Has the market power to compete effectively.   
         B)    Is large enough relative to the market to be taken into account by competitors.
         C)    Confronts a horizontal firm demand curve.
         D)    Is a price maker.

A4) For perfectly competitive firms, price     
         A)    Is greater than marginal revenue.    
         B)    Is equal to marginal revenue.
         C)    Is less than marginal revenue.
         D)    And marginal revenue are not related.

A5) The supply curve is upward-sloping (i.e., it takes a higher price to induce greater production) because of
         A)    Increasing total costs.    
         B)    Increasing fixed costs.
         C)    Increasing marginal costs.
         D)    The decreasing skill level of additional workers.

A6) In a perfectly competitive industry, economic profit:         
         A)    Can persist in the long run because of barriers to entry.      
         B)    Can persist in the long run because of homogeneous products.
         C)    Will approach zero in the long run as prices are driven to zero.
         D)    Will approach zero in the long run as prices are driven to the level of average total costs.

Answer 1

1.

Since the elasticity of demand can be defined as the measurement of the degree of the responsiveness of the quantity demand due to the change in the price level.

Ed= % change in the quantity demand/ % change in the price

Determinant of price elasticity of demand are;

Substitute goods; Those goods which have substitute goods, its demand will be elastic.

Hence it can be said that the demand will be more elastic if the consumer has more substitute goods to choose from.

Hence option c is the correct answer.

2.

Since in the perfectly competitive firm, there are large number of buyers and sellers and they sell identical product and price is determined by industry and not by the firm. So any firm or any buyers can buy or sell any quantity of goods at the market price. It means there is no effect of the individual demand or supply of goods on the market price. It means production decisions cannot affect the market price. There is perfect information about the product to the buyers and sellers.

The profit-maximizing condition of perfectly competitive firm is

P=MC

Hence it can be said that it is easiest for new firms to enter a perfectly competitive market.

Hence option A is the correct answer.

3.

Since in the perfectly competitive firm, there are large number of buyers and sellers and they sell identical product and price is determined by industry and not by the firm. So any firm or any buyers can buy or sell any quantity of goods at the market price. It means there is no effect of the individual demand or supply of goods on the market price. It means production decisions cannot affect the market price. There is perfect information about the product to the buyers and sellers.

The profit-maximizing condition of perfectly competitive firm is

P=MC

Since firm in the perfectly competitive firm is a price taker, so its demand curve is horizontal line because there is too large effect on the quantity demand due to very small change in the price. Hence the demand curve is perfectly elastic.

Hence it can be said that a perfectly competitive firm Confronts a horizontal firm demand curve.

Hence option C is the correct answer.

4.

Since in the perfectly competitive firm, there are large number of buyers and sellers and they sell identical product and price is determined by industry and not by the firm. So any firm or any buyers can buy or sell any quantity of goods at the market price. It means there is no effect of the individual demand or supply of goods on the market price. It means production decisions cannot affect the market price. There is perfect information about the product to the buyers and sellers.

The profit-maximizing condition of perfectly competitive firm is

P=MC

Since firm in the perfectly competitive firm is a price taker, so its demand curve is horizontal line because there is too large effect on the quantity demand due to very small change in the price. Hence the demand curve is perfectly elastic.

For a perfectly competitive firm price and MR are same because price for each unit of output is equal. Hence price is equal to MR.

Hence option B is the correct answer.

5.

The supply curve is upward-sloping (i.e., it takes a higher price to induce greater production) because of increasing marginal cost. Marginal cost is the addition in total variable cost due to producing an extra unit of output. It means when an additional unit of output is produced and there is an addition in the total variable cost, then this additional cost is called marginal cost.

MC=TVCn-TVCn-1

Hence option c is the correct answer.

6.

Since in the perfectly competitive firm, there are large number of buyers and sellers and they sell identical product and price is determined by industry and not by the firm. So any firm or any buyers can buy or sell any quantity of goods at the market price. It means there is no effect of the individual demand or supply of goods on the market price. It means production decisions cannot affect the market price. There is perfect information about the product to the buyers and sellers.

The profit-maximizing condition of perfectly competitive firm is

P=MC

Since firm in the perfectly competitive firm is a price taker, so its demand curve is horizontal line because there is too large effect on the quantity demand due to very small change in the price. Hence the demand curve is perfectly elastic.

Since in the long-run more firm enter in the industry until profit becomes zero.

Hence it can be said that in a perfectly competitive industry, economic profit will approach zero in the long run as prices are driven to the level of average total costs.

Hence option D is the correct answer.