Problem 1
When discussing pure competition, the term long run refers to a period of time long enough to allow: \(L O 11.1\) a. Firms already in an industry to either expand or contract their capacities. b. New firms to enter or existing firms to leave. c. Both \(a\) and \(b\) d. None of the above.
Problem 2
Suppose that the pen-making industry is perfectly competitive. Also suppose that each current firm and any potential firms that might enter the industry all have identical cost curves, with minimum ATC \(=\$ 1.25\) per pen. If the market equilibrium price of pens is currently \(\$ 1.50,\) what would you expect it to be in the long run? \(L O 11.2\) a. \(\$ 0.25\) b. S1.00. c. S1.25. d. S1.50.
Problem 3
Suppose that as the output of mobile phones increases, the cost of touch screens and other component parts decreases. If the mobile phone industry features pure competition, we would expect the long-run supply curve for mobile phones to be: \(L O 11.3\) a. Upward sloping. b. Downward sloping. c. Horizontal. d. U-shaped.
Problem 4
Using diagrams for both the industry and a representative firm, illustrate competitive long-run equilibrium. Assuming constant costs, employ these diagrams to show how ( \(a\) ) an increase and \((b)\) a decrease in market demand will upset that long-run cquilibrium. Trace graphically and describe verbally the adjustment processes by which long-run equilibrium is restored. Now rework your analysis for increasingand decreasing-cost industries and compare the three long-run supply curves.
Problem 5
Suppose that purely competitive firms producing cashews discover that \(P\) exceeds MC. Is their combined output of cashews too little, too much, or just right to achieve allocative efficiency? In the long run, what will happen to the supply of cashews and the price of cashews? Use a supply and demand diagram to show how that response will change the combined amount of consumer surplus and producer surplus in the market for cashews.
