Question

Please show as much work and explanation as possible, thank you so much!

7. Which ones of the followings are true in perfectly competitive markets? (a) The industry demand curve is flat. (b) Firms' marginal revenue is constant as quantity varies. (c) From a firm's perspective, its price elasticity of demand is zero. 8. Which ones of the followings are true about firms’ short-run behavior in a perfectly competitive market? (a) Firms shut down whenever profit is negative. (b) Firms try to maximize (Revenue - Variable Costs) (c) Firms shut down when price is lower than the minimum of AVC 9. Which ones of the followings are true about firms' behavior in a perfectly competitive market? (a) Firms exit the market in the long run when they make negative profit. (b) Firm's short-run ATC > LRAC at every output level q. (c) In an increasing cost industry, as firms exit the market, input prices increase. (d) In a decreasing cost industry, long-run industry supply curve is downward sloping.

Answer 1

7.

B

In perfect competition, the firm is a price taker firm where the price is decided at the industry level demand and supply. Once the price is decided, then it is for all the firms to be accepted. As a result, marginal revenue curve is a horizontal line, making price or MR to be constant for different level of output. Here, MR curve for the firm, is also a demand curve for the firm.

8.

C

Firms in the short run, will shut down, when price is less than the average variable cost, because it will increase losses wirh each output being sold. But, firm will continue the operations in the short run, if price is more than AVC, but less than ATC. Hence, getting negative profit is not going to make the firm to exit, as long as firm is earning more than AVC incurred.

Further, firm tries to maximize the profit. Here, profit = Revenue - total cost

9.

A

D

In the long run, firm can change different factors of production. Even after doing this, if firm earns negative profit, then firm will exit the industry. In the decreasing cost industry, the LR industry level supply curve will be downward sloping.