Author Question: Fill in the blank: Firms in a so-called perfectly competitive market would face a(n) ________ demand ... (Read 65 times)

robinn137 · **on:** Jun 29, 2018

Fill in the blank: Firms in a so-called perfectly competitive market would face a(n) ________ demand curve for their product.

A) horizontal
B) upward-sloping
C) vertical
D) downward sloping

Question 2

If the market for bottled water is perfectly competitive, how will the following aspects differ in the short run and in the long run?

a. Use of inputs
b. Market supply curve of bottled water when firms have identical cost structures
c. Profitability of firms with identical cost structures
d. Condition to stop production
e. Average cost curves of a firm
f. Number of firms

aidanmbrowne · **Reply #1 on:** Jun 29, 2018

Answer to Question 1

A

Answer to Question 2

a. Firms producing bottled water can change only variable inputs like the labor employed in production in the short run, while a few other inputs remain fixed. On the other hand, in the long run, there are no fixed inputs and the firm can vary the quantity of all inputs used.
b. The market supply curve of bottled water when firms have identical cost structures is upward sloping in the short run. In contrast, in the long run the market supply curve of firms with identical cost structures is horizontal.
c. Firms with identical cost structures can earn positive economic profits in the short run. On the other hand, in the long run, all firms with identical costs participating in the market for bottled water will earn zero economic profits.
d. In the short run, firms should continue production as long as the price of bottled water is greater than or equal to the average variable cost the firm faces. If the price falls below the average variable cost, the firm should stop production in the short run. In the long run, a firm should stop producing bottled water or exit from the market if the price of bottled water is less than the average total cost of the firm, or if the total cost exceeds total revenue.
e. The short-run average cost curves of firms will lie above the long-run average cost curves of the firms. This happens because, in the short run, a few inputs are fixed and do not allow for an optimal combination of fixed and variable inputs at times. On the other hand, in the long run, all inputs are variable, allowing for better input combinations and thus lower costs.
f. The number of firms operating in the market is fixed in the short run. In the long run, there is possible entry and exit of firms, and as such the number of firms operating in the market can change.