Question

please answer and explain

21) If all firms in a perfectly competitive industry are experiencing economic losscs, then: 21 A) sume fins will exit the industry, until sconoinic profit is positive B) soitie firms will exit the industry, uieic profit equals zero. C) some firms will exit the indusiry, until accounting prolfit equals zero. D) all existing firms will stay in the industry, hoping for better times. 23) If the market fur huiler is perfectly competit A) upward sloping. B) pertectly inelastic. C uni elati D) perfectly clastic. tive, then the demand curve fcing a fiem that produces buter will be:

Answer 1

21. If all firms in a perfectly competitive industry are experiencing economic losses, then:

Answer – Some firms will exit the industry, until economic profits equals zero.

This must be a case of long run where the firms can enter and exit the industry. The long run equilibrium condition says that the firms must get zero economic profit. Otherwise all firms must get normal profit (AC=AR). If they are getting loss means AC>AR.

If the firms get losses, then in the long run they will definitely exit the industry. So when some firms exit the industry, the volume of output automatically decreases. Consequently the supply curve shifts left hand side. Due to this the price increases and the existing firms get some relief. This will continue till the existing firms again reaches to the long run equilibrium condition of AC = AR.

22. If the market for butter is perfectly competitive, then the demand curve facing a firm that produces butter will be:

Answer – D) Perfectly elastic

In perfect competition market, the firms are price takers. The price is determined by the industry and the firms have to sell all their units at the same price. It otherwise means the Price will be equal to Average revenue and marginal revenue both. The demand curve, therefore, will be a straight horizontal line and the demand will be perfectly elastic.