Question

1. Why, if competitive firms are earning economic profits in the short run, are they unable to earn them in the long run?

		Firms enter and exit in the long run, which allows the firm to generate an economic profit in the long run.
		Firms enter and exit in the short run, which allows the firm to generate an economic profit in the short run.
		Due to the entry and exit of firms in the long run, firms only have the opportunity to make an economic profit in the short run.
		Due to the excessive entry and exit of firms in the short run, firms only have the opportunity to make a normal profit in the long run.

2. In this chapter we suggested that whenever market price fell below average variable costs, the firm will shut down. At that point, revenue is not covering its variable costs and the firm is losing more money than it would if it shut down and lost its fixed costs. Clearly, shutting the firm down is more complicated than that. Under what circumstances might the firm continue to operate even though prices are below average variable costs?

	The firm would continue to operate because it knows that other firms are leaving the industry so once those firms leave the industry, its profits will increase.
	It would not continue to operate. The firm would not want to continue to suffer losses.
	The firm would continue to operate because it is covering fixed costs even though average variable costs are not being covered.
	It would continue to operate if the firm knew that it could generate a profit in the long run

3. The opening of formal Cuban relations with the United States has led to greater trade between the two countries, especially in perfectly competitive products such as sugar, tobacco, and oranges. Explain what is likely to happen in the market for these agricultural products under increased trade with Cuba and how that might affect individual farmers in the United States.

	Trade barriers will increase because Cuba expects to generate more revenues from the United States.
	Agricultural trade will increase for products such as sugar, tobacco, and oranges.
	Individual farmers in the United States will produce more agricultural products to stay competitive with Cuba.
	Trade between the two countries for agricultural products will decrease.

4. Which of the following statements correctly describes the role that easy entry and exit play in competitive markets over the long run?

	Entry and exit of firms allows firms to earn an economic profit in the long run.
	Entry and exit is important in the long run because firms need competition from other firms in order to remain in business.
	Entry and exit of firms is nonexistent in the long run.
	As a result of entry and exit, firms earn a normal profit in the long run.