Study Questions #5 - Perfect Competition and Economic Efficiency 18 Econ 101 - Solutions for Study Questions #5 E. Lau PART A - Short Answer 1. The firm’s demand curve is represented by d1. It is a horizontal line at the going market price of the industry. The firm is a price taker, no matter how much or how little the firm produces, it will not be able to affect the industry’s (or the market’s) price. This also implies that there are many small firms in the industry, every firm is a price taker and faces a similar horizontal d1 curve. 2. If many firms leave the industry or the market, the market supply curve will shift leftward (slide inside). This will cause market supply to be reduced and the market price will rise. 3. See lecture notes (hand-outs on Profit Maximizing output). 4a False. In the real world, firms may not be operated by the owner. The managers may have their private motives other than profit maximization, i.e. helping friends or relatives out by hiring them even if they are not the most competent, buying inputs from high cost sources which give
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