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Profit Maximization and Competitive Supply – Questions for Review

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Questions for Review

  1. Why it would happen that a firm will choose the option of production instead of shutting down when it is at a stage where it is incurring losses?
  1. Why it is the case that the supply curve for the industry is not the marginal cost curve for the industry in the long run? Explain in your own words.
  1. Generally it is observed that all the firms which are a part of the industrial sector are able to reap just zero economic profit considering the case of long run equilibrium. Why the situation happens to be correct?
  1. What distinction is there between the producer surplus and the economic profit?
  1. Even if all the firms in the industry are aware that in the case of long run the economic profit will amount to be zero then considering the fact why do they still enter the industry?
  1. A lot of small scale based automobile manufacturers were there in the American market during the starting phase of the 20th century. But when the century was about to end the number of these automobile manufacturers got restricted to 3 only which were the big names in the market. Assume that this condition is not the resultant due to the lax federal applicability of the laws related to antimonopoly. Please explain the reasons behind the decline in the number of automobile manufacturers?

(Clue –think about the cost structure that is inherent or you can say already existing in relation to the industry of automobile sector)

  1. Given a particular situation that there is an industry named X and the main characteristic of this industry is that it has perfect competition situation. In this industry each and every firm is at such a level that the resultant economic profit is zero. Not even a single firm will be able to survive if the price of the product will fall down. Give your reasons that whether you approve or disapprove the given statement. Elaborate in your own words what you think about this situation.
  1. The compensation of the artists associated with the movies increase when there is a rise in the demand related to the movies. Whether the supply curve in the long run for the movies will be upward sloping or will it be horizontal? Give explanation for your answer.
  1. That output should be selected by the firm for production at which the average cost in the long run is going to be minimized. Whether the statement is true or is it false? Kindly provide the explanation in support of your answer.
  2. If the supply curve in an industry is upward sloping then can you assume that there will be a situation of constant return of scale (stable returns)? Clarify in your own words.

11.If a market is perfectly competitive then what are the basic assumptions which will be an integral part of it? Covering all the crucial aspects that you have studied in this lesson, why it is so that each of the associated assumption is highly significant?

  1. Given a condition that there is an increase in the demand encountered by the competitive industry. Which means that the demand curve in such a case will shift towards the upwards position. In such a situation how the competitive market will ensure that it meets the level of increased output. You need to explain the steps undertaken for it. Would your answer vary if the government decides to implement the decision of price ceiling in such a situation?
  1. Considering per acre of land where tobacco is grown the government decides to pass a law which will provide a considerable subsidy in such a case. If such a program gets implemented then how this policy will be affecting the supply curve in the long run in case of tobacco?
  1. There is a situation where a certain brand in the case of vacuum cleaners can be easily bought through the wide range of local stores nearby and also it is easily available by the way of online purchasing through websites or catalogues.
  2. If there is a condition that all the sellers are asking for the similar price from the buyers for the vacuum cleaner then whether in the long run they all will be earning just zero economic profit?
  3. If there is a condition that same price is being offered by all the sellers but there is one seller operating locally and he is the owner of the building where he is conducting his business operations, so there is no need for him to pay any sort of rent. In this case will this seller have an advantage of economic profits which will be positive in nature?

C.If talking about that seller who is not paying any sort of rent for the business activities, then will he be having an advantage to bring down (lower) the price that is being charged from the customers for the vacuum cleaner?


There are a couple of aspects that has to be understood when markets are taken into consideration.

  • If many firms face horizontal demand curve, they may think of being in the same league as perfectly competitive market. However, multiple firms in a market do not depict a healthy market scenario eithe
  • When in perfectly competitive market, marginal revenue curve is similar to demand curve. This happens because in competitive markets, outputs are chosen in regards to production with no such effect on price rates.
  • Managers are placed in trying situations with various complexities. With firms certain long run effects can be maximized in terms of profit.
  • In short run, it has to be seen that good that is chosen is produced by the firm, has price rate similar to marginal cost. While price rate should always be more than or similar to average cost rates.
  • When there is a factor of production that is difficult to get and there is a minimum amount payable to that party, it can be seen that economic rent is taken into consideration. When placed in competitive market, economic rent is similar to producer surplus.
  • When placed in long run, competitive markets which maximize profits, long run marginal cost is similar to price rates.
  • When minimum cost is negated from revenue it results in producer surplus. In short and long run situations, this producer surplus and it is placed above production cost that is marginal in nature.
  • When long run competitive equilibrium is placed: Maximization of profit and with firms earning zero profit the whole point of entering the industry is negated.
  • When long run supply curve is taken into consideration, if demand for inputs increases to a certain level, then market price of those inputs are not changed. But when there is cost increasing industry, long run supply curve that is associated with a firm, is upward sloping then input prices in market rises.


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