Chapter 24 Perfect Competition Exam V2 MULTIPLE CHOICE.

Choose the one alternative that est completes the statement or ans!ers the "#estion. $% & firm in a perfectl' competitive in(#str' is a A) price taker. B) price searcher. C) price controller. D) price competitor.

2) Under perfect competition, a firm that set price slightly above the market price wo ld A) make lower profits than the other firms, b t the amo nt wo ld depend on the elasticity of demand. B) be forced to lower price again beca se the firm wo ld not be able to stay in b siness with the red ced reven es. C) lose all of its c stomers. D) earn higher profits as long as the other firms contin ed to charge the market price. !) A) B) C) D) A price taker is someone who takes the highest price possible. cannot infl ence the price. searches for the best price, and then takes the highest profits possible. b ys inp ts for firms.

") Based on the ass mptions of the perfectly competitive model, cons mers will base their decisions on which firm to p rchase a good from on the basis of A) # ality. B) c stomer service. C) rep tation. D) price. $) A) B) C) D) %hich of the following is not a characteristic of perfect competition& 'here are a large n mber of b yers and sellers 'he firms in an ind stry prod ce heterogeneo s goods Any firm can enter or leave the ind stry witho t serio s impediments Both b yers and sellers have e# ally good information

() )n the model of perfect competition one price prevails for any specific good. All of the following ass mptions are needed to get this res lt e*cept A) there are a large n mber of b yers and sellers. B) the prod ct sold by the firms in the ind stry m st be homogeneo s. C) any firm can enter or leave the ind stry witho t serio s impediments. D) both b yers and sellers have e# ally good information. +) A perfectly competitive prod cer faces a demand c rve that is A) downward sloping. B) pward sloping. C) hori,ontal. D) vertical.

-) %hich of the following statements is correct& A) 'he demand c rve of the perfectly competitive ind stry is hori,ontal as are the demand c rves facing the individ al firms. B) 'he market demand c rve of perfect competition is hori,ontal beca se the individ al cons mers are b ying a homogeneo s prod ct. C) 'he market demand c rve of the perfectly competitive ind stry is downward sloping while the demand c rve facing an individ al firm is hori,ontal. D) 'he market demand c rve of the perfectly competitive ind stry is downward sloping, so the demand c rves of the individ al firms are also downward sloping. .) A) B) C) D) 'he demand c rve of a perfectly competitive firm is perfectly elastic. perfectly inelastic. elastic at high prices and inelastic at low prices. identical to the elasticity of demand on the market demand c rve.

/0) %e ass me that firms, when they are deciding the best rate of o tp t at which to prod ce, A) try to get the highest price possible. B) want to ma*imi,e sales. C) want to minimi,e costs. D) want to ma*imi,e profits. //) A) B) C) D) /2) A) B) C) D)
13) A) B) C) D) 1!) A) C)

1or a perfect competitor, price e# als marginal reven e only. average reven e only. both average reven e and marginal reven e. neither marginal reven e not average reven e. Under perfect competition, the firm m st decide the best price to charge for its prod ct. the best rate of o tp t it sho ld prod ce. the optimal price2o tp t combination. the optimal level of # ality and the packaging that will ma*imi,e profits.
Marginal revenue equals total revenue divided by output. price times quantity, divided by average revenue. total revenue divided by average revenue. the change in total revenue rom selling one more unit. "or a per ect competitor, marginal revenue equals the slope o the demand curve. B) average revenue divided by price. price divided by average revenue. D) price.

1#) $he per ectly competitive irm ma%imi&es pro its 'hen A) it produces and sells the quantity at 'hich the di erence bet'een marginal revenue and marginal cost is the greatest.

B) it produces and sells the quantity at 'hich marginal revenue and marginal cost are equal. C) it produces and sells the quantity at 'hich the di erence bet'een average revenue and average cost is the greatest. D) it produces and sells the quantity at 'hich the di erence bet'een price and average cost is the greatest. 1() ) marginal revenue is less than marginal cost, the irm should A) raise price. B) raise marginal revenue. C) increase its rate o output. D) decrease its rate o output.

1*) +e er to the table above. ) the price is ,1-, the per ectly competitor should produce A) bet'een 1-3 and 1-! units. B) 1-* units. C) 1-. units. D) 11- units. 1/) +e er to the table above. ) price is initially ,! and then increases to ,/, the per ect competitor 'ill A) double output. B) increase output by 1- units. C) increase output by / units. D) increase output by ! units. 1.) A per ectly competitive $his implies that it is A) ma0ing the most pro its B) ma0ing the most pro its positive. C) ma0ing the most pro its &ero. D) ma0ing the most pro its total cost. 1-) irm is ma%imi&ing pro its in the short run. possible and that pro its are positive. possible and that pro its are either &ero or possible, 'hich can be positive, negative, or possible, 'hich is 'here price equals average

$he di erence bet'een price and average total cost is A) total pro its. B) marginal pro its. C) average pro it. D) an irrelevant quantity.

2/) 3efer to the fig re above. )f the price is 4!.+0, profits are A) ,ero B) 42//2.$0 C) 4!2$0.00 D) 4$!(2.$0 22) 3efer to the fig re above. %hat are the firm5s profits if the price is 42.00& A) 6ero B) 242$00 C) 242(2$ D) 24!000 2!) 3efer to the fig re above. )f the firm is making ,ero profits, then it is selling A) 2$00 nits at a price of 42.00 B) !2$0 nits at a price of 4!.+0 C) !000 nits at a price of 4!.00 D) "-00 nits at a price of 42.-0
1!) +e er to the igure above. 2hat are the ma%imum losses the ma0e in the short run3 A) 4ero B) ,1#-C) ,1(1# D) Cant tell rom this igure. More in ormation is needed. 1#) +e er to the A) ,3.--. igure above. $he short5run shutdo'n price is B) ,1./-. C) ,1.--. D) ,1.#-. irm 'ould

1() A) B) C) D) 1*)

A irm 'ill shut do'n in the short run 'hen price is belo' average total costs at all possible rates o output. price is belo' average variable costs at all possible rates o output. price is belo' marginal cost at all possible rates o output. 'henever it is ma0ing a loss. A per ect competitor should never ma0e losses A) at all. B) greater than its variable costs.

C) 1/)

greater than its total costs. D) greater than its

i%ed costs.

A irm that shuts do'n in the short run e%periences losses equal to A) &ero. B) total variable costs. C) total i%ed costs. D) total costs.

1.) 6uppose a irm is producing in the short run but ma0ing it equal to its i%ed costs minus ,#--. ) its i%ed costs increase by ,1---, the irm should A) shut do'n because its i%ed costs increased by more than ,#--. B) shut do'n, but it should have shut do'n even be ore the i%ed costs increased. C) increase its rate o output in order to increase revenues and reduce its losses. D) not change its rate o output even though it is ma0ing a larger loss because it is still covering its variable costs. 3-) A irm is currently producing at the rate o output that 7ust covers its variable costs. ) demand alls, the irm should A) lo'er both price and its rate o output. B) shut do'n. C) increase its rate o output to ma0e up or the lo'er price. D) not change its rate o output because it is still covering its variable costs. 31) A) B) C) D) Accounting pro its are the irm8s short5run brea05even point are &ero. positive. negative. indeterminate 'ithout more in ormation.

31) $he irm is ma0ing a ! percent accounting rate o return in the short run. $hen it is ma0ing an economic rate o return that is A) &ero. B) positive, but less than ! percent. C) negative. D) indeterminate 'ithout more in ormation. 33) $he o'ner o a per ectly competitive irm that is ma0ing economic losses in the short run A) should alter the rate o output in order to increase pro itability. B) should cut his o'n salary in order to reach the brea05even point. C) is actually losing more than he thin0s because the opportunity cost o his time has not yet been considered. D) is ma0ing less than he 'ould i he 'or0ed or someone else. 3!) $he short9run supply curve o a per ect competitor is A) its average variable cost curve. B) its marginal revenue curve. C) its marginal cost curve. D) its marginal cost curve equal to or above the minimum point on its average variable cost curve.

3#) A per ectly competitive irm is producing &ero units o output in the short run. 2e 0no' that price is A) &ero. B) belo' the minimum point o its average variable costs. C) belo' the minimum point o its average total costs. D) bet'een the minimum points o average total costs and average i%ed costs. 3() $he short5run industry supply curve is ound by A) hori&ontally summing the marginal cost curves o all irms in the industry. B) hori&ontally summing the marginal costs curves that lie above the minimum point o the average total cost curve o all irms in the industry. C) adding up the quantities supplied at each price by each irm in the industry. D) adding up the quantities supplied at each price by each o the irms in the industry that are ma0ing a pro it. 3*) A) B) C) D) 3/) A) B) C) D) $he short5run industry supply curve slopes up because the irms eventually e%perience diseconomies o scale. the la' o diminishing marginal returns applies in the short run. 'ages increase as the industry increases output. the higher price is needed to get more irms to enter the industry. $hings that also things things that things that things that cause the short9run supply curve to change are that a ect demand. a ect total costs. a ect variable costs. a ect the mar0et but not the individual irm.

3.) An increase in the productivity o labor causes A) quantity supplied by each irm in a competitive industry to increase. B) supply in a competitive industry to increase. C) the mar0et price to increase in a competitive industry. D) the irms supply curve to shi t but has no e ect on the industry supply curve. !-) ) the 'age rate increases and irms in a per ectly competitive industry are hiring labor, then A) the irms 'ill quit using labor. B) the quantity supplied in the industry 'ill decrease. C) mar0et supply 'ill decrease. D) mar0et price 'ill decrease. !1) :nder per ect competition, the demand curve acing the irm is determined by A) the intersection o the industry demand and supply curves. B) the tastes and pre erences o consumers. C) utility ma%imi&ing behavior on the part o consumers. D) the 'illingness o the irm to supply the good. !1) $he mar0et demand curve in per ect competition is ound by A) hori&ontally summing the demand curves o the individual irms in the industry. B) hori&ontally summing the demand curves o the individual consumers. C) utility ma%imi&ing behavior o the ;representative consumer<.

D) the interaction o consumers levels.

supply and demand at the individual

irm and

!3) )n a competitive mar0et, demand and supply intersect at a price o ,/. "rom this 'e 0no' that A) the average total cost o producing the good is ,/. B) the average variable cost o producing the good is ,/. C) the marginal cost o producing the good is ,/. D) the irm is ma0ing a positive economic pro it at a price o ,/ or more. !!) A) B) C) D) )n the long run, a per ect competitor can ma0e positive pro its but 'ill not ma0e losses. can ma0e positive pro its or losses. ma0es &ero pro its. produces at its shut5do'n point.

!#) 6ignals are A) used by economic decision5ma0ers to in orm others about their plans. B) the method by 'hich government planners in orm economic decision ma0ers about the types o decisions they should ma0e. C) the method by 'hich economic e iciency is achieved. D) compact 'ays o conveying to economic decision ma0ers in ormation needed to ma0e economic decisions. !() A) B) C) D) A true signal must convey in ormation only. convey in ormation and provide the inventive to act appropriately. convey in ormation about 'hat should be done and 'hy it should be done. e%plain 'hy something should be done only.

!*) =ro its and losses are true signals because they A) convey in ormation about 'here to place resources. B) cannot be misinterpreted by entrepreneurs. C) convey in ormation about 'here to place resources and re'ard people 'ho act on the in ormation. D) re'ard people 'ho ma0e pro its 'ith even more pro its and punish those 'ho ma0e losses 'ith even more losses. !/) "irms in a per ectly competitive industry are ma0ing economic losses. $his is A) a signal to entrepreneurs that some o the irms in the industry should e%it and the resources o these irms should move into production o other goods. B) a signal to entrepreneurs that additional resources should be brought into this industry in order to ma0e it pro itable. C) a signal that the entrepreneurs are doing a poor 7ob and should become 'or0ers or someone else. D) a signal to government o icials that a subsidy is needed or the irms in the industry. !.) 2hich o the ollo'ing 'ould tell us that resources are not their highest valued uses3 A) 6hort5run pro its B) 6hort5run losses lo'ing to

C) #-) A) B) C) D) #1) A) B) C) D)

>ong5run pro its

D) 6ome

irms going out o

business

Along an industry8s long5run supply curve, pro its are positive. pro its are &ero. entrepreneurs earn an above9average rate o the number o irms is constant.

return.

) the long5run supply curve is up'ard sloping, 'e 0no' that entrepreneurs are earning higher pro its as output e%pands. some input prices are increasing as the industry e%pands. irms are getting larger as the industry output e%pands. the la' o diminishing marginal returns has set in.

#1) 6uppose a per ectly competitive industry is in long9run equilibrium. ) a decrease in demand leads to a lo'er long5run price, 'e 0no' that A) this is a decreasing9cost industry. B) this is an increasing9cost industry. C) some irms 'ill be losing money in the long run. D) a ter urther ad7ustments, price 'ill rise to its original level. #3) A) B) C) D) A per ectly elastic long9run supply curve indicates a decreasing9cost industry. a constant9cost industry. an increasing9cost industry. that some input prices change as irms enter and e%it the industry.

#!) +e er to the igure above. 6uppose the original equilibrium is at ? and then demand increases to D1. 2e 0no' that A) ?1 is the ne' short5run equilibrium and that irms are ma0ing positive economic pro its. B) ne' irms are not yet entering, but 'hen they do they 'ill ace the same input prices as e%isting irms. C) the entry o ne' irms caused some input prices to increase. D) some o the irms are ma0ing economic pro its 'hile other irms are ma0ing &ero economic pro its.

##) A) B) C) D) #() A) B) C) D) #*) is

+e er to the igure above. $he industry in the igure is a@n) decreasing9cost industry. constant5cost industry. increasing9cost industry. industry that is not yet in long5run equilibrium. ) a per ectly competitive industry is in long9run equilibrium, then price equals average cost. price is greater than average cost and equal to marginal cost. all irms earn the same accounting pro its. marginal cost is less than average cost. $he opportunity cost to society o A) C) average cost. e iciency costing. producing one more unit o the good

B) marginal cost. D) the optimal cost.

#/) 2hen price equals marginal cost A) irms ma0e &ero pro its. B) irms ma0e positive pro its. C) the industry is in long5run equilibrium. D) the marginal bene its o consuming an e%tra unit o the good e%actly equals the marginal cost to society o producing the good. #.) $he value o total output decreases 'hen labor leaves one industry and goes to another and capital leaves the second industry and goes to the irst. $his indicates that A) the irst situation 'as not e icient. B) the second situation is e icient. C) price is greater than marginal cost. D) it 'ould be e icient to return to the irst situation. (-) units A) B) C) D) 6uppose the per ectly competitive equilibrium occurs such that too many o the good are produced. $his is an e%ample o marginal cost pricing. mar0et ailure. irms being unable to e%it the industry. greedy business people behaving in an inappropriate manner.

(1) 2ith marginal cost pricing A) marginal bene its are usually less than marginal cost. B) all opportunity costs 'ill be covered in the short5 run. C) the price charged is equal to the opportunity cost to society o producing one more unit o the good. D) there can not be any short5run economic pro it. (1) A) C) 2hen M+ A MC or a irm, the irm should reduce its level o output. B) stay at the same level o stop producing. D) increase output, unless = A ABC. output.

(3)

?ach A) C)

irm in a per ectly competitive industry is producing a unique product. B) relatively large. a price ta0er. D) a price setter.

(!) 2hich o the ollo'ing is CD$ a characteristic o a per ectly competitive industry3 A) $here are a large number o buyers and sellers. B) $he irms in the industry produce a homogeneous product. C) 6ellers have better in ormation about the product than consumers. D) Any irm can enter or leave the industry 'ithout serious impediments. (#) $he ;lemons problem< is a situation in 'hich A) consumers have more in ormation than sellers about the quality o a product. B) sellers are able to coerce buyers into buying products they really don8t 'ant. C) consumers are only 'illing to pay the price o a lo'9quality product because they don8t 0no' the actual level o quality. D) sellers are un'illing to manu acture high quality items because people don8t 'ant high quality products. (() A) B) C) D) $he demand curve o a per ectly competitive industry is do'n'ard sloping. hori&ontal. vertical. indeterminate 'ithout more in ormation.

(*) $he demand curve o a per ectly competitive irm is A) elastic at relatively high prices and inelastic at relatively lo' prices. B) per ectly elastic. C) per ectly inelastic. D) unitary elastic. (/) A irm in a per inds A) the price at 'hich B) the quantity at C) the quantity at D) the quantity at (.) ectly competitive mar0et ma%imi&es pro its 'hen it total 'hich 'hich 'hich revenue minus total revenue total revenue total revenue total cost is the greatest. minus total cost is the greatest. equals total cost. is ma%imi&ed.

"or a irm in a per ectly competitive mar0et, average revenue equals A) average cost. B) the change in total revenue. C) price. D) price divided by quantity.

*-) A irm should continue producing until A) the cost o producing the output equals the revenues obtainable rom selling the output. B) the cost o increasing output by one more unit equals the revenues obtainable rom selling the e%tra unit. C) average costs are at a minimum. D) the average cost 'hen another unit is produced equals the average revenue obtainable rom selling the e%tra unit.

*1) A irm see0ing to ma%imi&e pro its should produce at the rate o at 'hich A) total revenue equals total cost. B) marginal revenue equals marginal cost. C) average revenue equals average cost. D) marginal revenue equals average revenue.

output

*1) =rice equals the minimum o long9run average cost A) in a long5run equilibrium. B) in a short5run equilibrium as 'ell as in a long5run equilibrium. C) 'henever average revenue equals marginal cost. D) along a hori&ontal long5run supply curve, but not along an up'ard5 sloping long5 run supply curve. *3) 2hich o the ollo'ing is CD$ a characteristic o a per ectly competitive long9run equilibrium3 A) "irms are ma0ing &ero pro its. B) =rice equals marginal cost. C) =rice equals long5run minimum average cost. D) "irms are producing on the do'n'ard9sloping portions o their short5run average cost curves. *!) Competitive pricing is e icient because A) the price that consumers pay re lects the opportunity cost to society o producing the good. B) irms ma0e positive economic pro its in long5run equilibrium. C) average revenue equals average cost. D) irms produce above the minimum e icient scale. *#) A mar0et ailure is a situation in 'hich A) resources are being e iciently allocated, but some companies are orced to shut do'n. B) the mar0et equilibrium leads to either too many or too e' resources going to'ards producing the good or service. C) the government must ta0e actions to correct the ailures o the mar0et in a particular industry. D) there is not ree entry or e%it into an industry. *() ) price is belo' average variable costs at all rates o output, the quantity supplied by a per ect competitor 'ill equal A) &ero. B) the rate o output 'here price equals marginal cost. C) the rate o output associated 'ith the brea0 even point. D) the rate o output 'here marginal revenue equals average i%ed costs. **) )n the model o per ect competition, the mar0et demand curve is ound by A) a mar0eting analysis. B) ta0ing the demand curve o a representative consumer and e%panding it by the number o consumers o the good. C) hori&ontally summing the demand curves o individual consumers. D) hori&ontally summing the supply curves o individual irms.

*/) =ro its and losses are true mar0et signals because they A) convey in ormation in an asymmetrical ashion. B) convey in ormation about 'here resources should lo' into or out o , and they re'ard people 'ho act on the in ormation. C) convey in ormation to public o icials about 'here to encourage people to invest and 'hat s0ills people should develop. D) cause people to move into careers in both undesirable desirable industries 'ith equal ease. *.) A la' that restricts plant closings 'ill A) ma0e the economy more e icient by slo'ing do'n the movement o resources to a more optimal rate. B) ma0e the economy more e icient by reducing poor decisions on the part o entrepreneurs. C) prevent resources rom lo'ing to their highest valued uses. D) allo' pro its and losses to provide a signaling unction. /-) A constant9cost industry A) is one in 'hich an increase in demand is matched by a proportional increases in long5run supply. B) generates increasing pro its 'henever demand increases because the ne' long9run equilibrium price is above the old price even though average costs have not changed. C) has a hori&ontal long5run supply curve. D) has a do'n'ard5sloping long5run supply curve. /1) A) B) C) D) $he short9run brea09even price is the point at 'hich price is less than marginal cost. marginal cost, average total cost and marginal revenue are all equal. average variable cost is at a minimum. marginal cost, price and average variable cost are all equal.

/1) A irm is currently producing the quantity 'here price equals the minimum point on the average variable cost curve. ) 'age rates increase, the irm 'ill A) increase its rate o output to ma0e up or the higher variable costs. B) shut do'n since it 'ould no longer be covering its variable costs. C) decrease its rate o output to o set the higher variable costs. D) not ma0e any changes since its current rate o output is still minimi&ing its losses. /3) A) B) C) D) /!) A) B) C) D) ?conomic pro its at the short5run brea05even point are positive. negative. equal to &ero. indeterminate since they also depend on the si&e o the Accounting pro its at the irms brea09even point are positive. negative. &ero. indeterminate since 'e need to 0no' 'hat demand is.

i%ed costs.

/#) )n a per ectly competitive mar0et, a irm8s A) its total cost curve. B) its marginal cost curve equal to or above 'ith its average variable cost curve. C) its average variable cost curve belo' the its total cost curve. D) its total cost curve bet'een the shutdo'n point.

short9run supply curve equals the point o point o intersection

intersection 'ith

point and the brea05even

/() According to the igure above, i the irm is ma0ing &ero pro its, 'hat quantity is the irm selling and at 'hat price3 A) E F 1--G = F ,! B) E 1---G = F ,# C) E F /--G = F ,! D) E 11--G = F ,*.-/*) A irm ma0ing losses should operate in the short run as long as A) the price per unit sold is greater than the average i%ed cost per unit produced. B) the price per unit sold is greater than the average variable cost per unit produced. C) marginal revenue is greater than the price per unit sold. D) the price per unit sold is equal to or greater than the marginal cost o production. //) A) B) C) D) A irm that shuts do'n in the short run e%periences losses equal to its total i%ed costs. average variable costs. total variable costs. total variable costs minus its total i%ed costs.

/.) According to $able 13-1A, i the price is ,1- or a competitive mar0et, then the irm should produce A) 1-! units. B) 1-( units. C) 1-/ units. .-) $he marginal revenue curve o a per ectly A) has a vertical intercept equal to e%actly intercept or the demand curve. B) lies belo' the demand curve and above the C) intersects the average revenue curve rom the average revenue curve. D) is also the demand curve. .1) A) B) C) D)

irm in a D) 11- units.

competitive irm one9hal o the vertical average revenue curve. above at the ma%imum point o

=ro it per unit is ound by the di erence bet'een average revenue and average total cost. marginal revenue and marginal cost. total revenue and total cost. average revenue and marginal cost.

ESSAY. Write your answer in the space provided or on a separate sheet of paper.
1) 2hat is a price ta0er3 Discuss the assumptions used to obtain the per ectly competitive model. Ans'erH A price ta0er, or per ectly competitive irm, is a irm that must ta0e the price o its product as given because it cannot in luence the price. $he model o per ect competition uses our assumptions. $here is a large number o buyers and sellers such that no one has any in luence on price. $he product is homogeneous so the output o one irm is a per ect substitute or the output o another irm. Buyers and sellers have all the in ormation they need to determine the lo'est price and best production technique. "inally, all irms can enter o leave the industry 'ithout serious impediments. 1) Describe and e%plain ho' the per ectly competitive irm8s demand curve is ound. Ans'erH $he interaction o supply and demand in the industry determines the price. $he irm is a price ta0er, so it ta0es the price as a given. )t can sell as many units as it 'ants at this price. Ience, the demand curve is per ectly elastic, or hori&ontal, at the mar0et price.

3) ;Demand curves slope do'n, so the demand curve o a price ta0er must also be do'n'ard sloping.< Do you agree or disagree3 2hy3 Ans'erH )ndividual consumer8s and mar0et demand curve slope do'n. Io'ever, the demand curve o the competitive irm is not the demand o the irm or the good. )t is the demand curve or its product it aces in the mar0etplace. )t the irm tries to raise price consumers s'itch to other sellers 'ho are charging the mar0et price. )t has no choice but to sell at the mar0et price. !) 2hat does a per ectly competitive irm do to ma%imi&e pro its3 Ans'erH $he per ect competitor cannot in luence price so it must ind the rate o output that ma%imi&es its pro its. $he pro it9ma%imi&ing rate o output is 'here marginal revenue equals marginal cost. ) marginal revenue is greater than marginal cost, an additional unit increases revenues more than costs, so pro its increase. ) marginal revenue is less than marginal cost, a reduction in output o one unit reduces costs more than revenues, so pro its increase. $he ma%imum is 'hen marginal revenue equals marginal cost. #) 2hat is the short9run brea09even price3 2hat are economic pro its at this price3 2hy 'ould a irm be 'illing to operate permanently at this price3 Ans'erH $he short9run brea09even price is the price at 'hich total revenue equals total costs, or pro its are &ero. $hat is, economic pro its are &ero. $he irm is 'illing to stay in business at &ero pro its because all opportunity costs are covered, including the opportunity costs o the entrepreneur8s time and any other resources he or she brings into the irm. $he &ero economic pro its are associated 'ith a normal rate o return, and the entrepreneur cannot e%pect to do better any'here else. () 2hat determines the per ect competitor8s supply curve3 Io' is the industry supply curve ound3 Ans'erH A supply curve sho's the quantity supplied at various prices. $he irm decides ho' much to supply at each price by equating price and marginal cost. $here ore, the marginal cost curve sho's the quantity supplied at each price. Io'ever, at a price belo' the shutdo'n price, output is &ero, so that portion o the marginal cost curve is not part o the supply curve. $he industry supply curve is ound by adding the quantities supplied o each irm or each price. )t is the hori&ontal summation o the individual irms8 supply curves. *) 2hy does the industry short5run supply curve slope up3 Ans'erH $he industry short5run supply curve slopes up because the individual irms8 short5run supply curves slope up. $he per ect competitors short5run supply curve slopes up because the marginal cost curve slopes up, and the marginal cost curve slopes up because o the la' o diminishing marginal returns. Ience, the industry short5run supply curve slopes up because o the la' o diminishing marginal returns. /) 2hen irms in a per ectly competitive industry are ma0ing positive pro its, 'hat happens in the long run3 Ans'erH $he pro its are a signal to entrepreneurs to enter the industry, bringing resources 'ith them, and to increase production o the good. As irms do this, the industry short9run supply curve shi ts out, price alls, and pro its all. 2hen pro its are &ero, ne' irms 'ill no longer enter the industry and a long5 run equilibrium has been reached.

.) 2hat are signals83 Io' do pro its unction as signals3 Ans'erH 6ignals are compact 'ays o conveying to economic decision ma0ers in ormation needed to ma0e decisions. A signal not only conveys in ormation, but also provides the incentive to react appropriately. ?conomic pro its are such signals because they signal to entrepreneurs 'here they should operate, and provide the incentive in that the entrepreneurs8 incomes are increased 'hen they respond to the signals. 1-) 2hat determines 'hether the industry long5run supply curve is up'ard sloping or hori&ontal3 Ans'erH 2hen irms enter and e%it the industry, ne' resources are either dra'n into the industry or are temporarily le t unemployed. )t these movements in resources cause resource prices to change, then the industry 'ill be an increasing5cost industry and have an up'ard5sloping long5run supply curve. ) these movements in resources do not a ect resource prices, then the industry is a constant5cost industry and the long5run supply curve is hori&ontal. 11) 2hat is marginal cost pricing3 2hy is marginal cost pricing important3 Ans'erH Marginal cost pricing is a system in 'hich price equals the opportunity cost to society o producing one more unit o the good, 'hich is the marginal cost o the good. )t is e icient in the sense that it is impossible to increase the output o any good 'ithout lo'ering the value o the total output produced by the society as a 'hole.