In this chapter, the discussion on competitive markets tells us that each firm's demand curve is horizontal. Is this not inconsistent with the industry's demand curve, which slopes downward?
What will be an ideal response?
No, this is not inconsistent. The industry's demand curve slopes downward because consumers in a market will buy more only at a lower price. Given an industry supply curve, an equilibrium price is established in the market. Each firm takes this equilibrium price as given and serves as many consumers as it can. Each firm is therefore a price taker at that equilibrium price. So the demand curve is conceptually horizontal from a firm's perspective.
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T-Shirt Enterprises is operating in a perfectly competitive market. It is producing 3,000 t-shirts and selling them for $10 each. At this level of output, the average total cost is $10.50 and the average variable cost is $10.20. Based on these data, the firm should
A. decrease production to 2,500 t-shirts. B. shut down in the short run. C. continue to produce 3,000 t-shirts. D. increase production to 3,500 t-shirts.
Several studies in the 1990s concluded that the consumer price index overstated inflation by about
a. 3 percentage points per year, and that number of percentage points likely still applies now. b. 3 percentage points per year, but recent improvements to the CPI probably have reduced the overstatement of inflation to something less than 3 percentage points. c. 1 percentage point per year, and that number of percentage points likely still applies now. d. 1 percentage point per year, but recent improvements to the CPI probably have reduced the overstatement of inflation to something less than 1 percentage point
The law of diminishing returns indicates that the marginal physical product of a variable input declines as more of it is employed, ceteris paribus.
Answer the following statement true (T) or false (F)
Given the production function and total cost function shown in Chapter 4, as production increases, total fixed costs
A. decrease constantly. B. increase constantly. C. remain constant. D. increase for a while and then decrease.