ECN E102 Lecture Notes - Lecture 30: Market Price, Marginal Cost

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9 Dec 2020

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Suppose that everyone has access to the same technology for producing the good and access to the same market to buy the inputs into production all current and potential firms have the same cost curves. Decisions about entry and exit depend on the incentives facing the owners of existing firms and the entrepreneurs who could start new firms. If firms already in the market are profitable, then new firms will have an incentive to enter the market if economic profits are being made, the firm has a supernormal rate of return. This entry will expand the number of firms, increase the quantity of the good supplied, and drive down prices and profits. If firms in the market are making losses, then some existing firms will exit the market. Their exit will reduce the number of firms, decrease the quantity of the good supplied, and drive up prices and profits.

Related Questions

When new firms have an incentive to enter a competitive market, their entry will:

a. Make no change in the existing market prices

b. Drive down the profits of the already existed firms in the market.

c. Make no change in the quantity supplied in the market.

d. All of the above

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1) When positive economic profits exist in an industry:

the market price of the good produced by the industry is less than the marginal cost faced by the industry.

the market price of the good produced by the industry is less than the average total cost of the industry.

there is an exit of firms from the industry.

resources flow from less productive uses to that particular industry.

2) When price is less than the firms' minimum average total cost, ________.

firms' profits are likely to be maximum

prices are likely to fall further

new firms will enter the market

existing firms will leave the market

3) The entry of new firms into a perfectly competitive market will cause:

an increase in the profitability of existing firms.

a decrease in the profitability of existing firms.

a right shift of the demand curve of the good being produced by the firms.

a left shift of the demand curve of the good being produced by the firms.

4) Entry of new firms into an existing market causes:

a downward movement along the market supply curve.

a leftward shift of the market supply curve.

an upward movement along the market supply curve.

a rightward shift of the market supply curve.

5) The incentive for new firms to enter into a perfectly competitive market is primarily the:

high level of government intervention in the market.

large number of buyers in the market.

large number of existing firms in the market.

positive profits observed for the existing firms in the market.

11. When firms have an incentive to exit a competitive market, their exit will:

a. drive down market prices.

b. drive down the profits of existing firms in the market.

c. decrease the quantity of goods supplied in the market.

d. All of the above are correct.

12. If a perfectly competitive firm currently produces where the price is greater than the marginal cost, it:

a. will increase its profits by producing more.

b. will increase its profits by producing less.

c. is making positive economic profits.

d. is making negative economic profits.

13. Does a consumer well being vary along a demand curve?

a. Yes. When price increases, consumers move to a lower indifference curve.

b. Yes. When price increases, consumers move to a higher indifference curve.

c. No. When price increases, consumers stay on the same indifference curve.

d. No. When price increases, the higher price has no effect on budget constraints or indifference curves.

e. None of the above

14. If a competitive firm sets its output such that marginal revenue, marginal cost, and average total cost are equal, economic profit must be:

a. Negative

b. positive

c. Zero

d. Indeterminate from the given information

15. Which of the following is a characteristic of a perfectly competitive market?

a. Firms are price setters.

b. There are few sellers in the market.

c. Firms can exit and enter the market freely.

d. All of the above are correct.

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ECN E102 Lecture Notes - Lecture 30: Market Price, Marginal Cost

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