Question

Multiple Choice - Choose the correct alternative

1. The long-run competitive market supply curve is: a) The portion of the firms MC curve that is above the ATC curve b) The portion of the firms MC curve that is above the AVC curve c) The horizontal summation of all the firm's short-run supply curves d) A curve that is equal to the minimum of ATC e) a) and d) 2. Suppose the firms production process is given by Q = 2KŻL. If K=16 and L=8 what is the marginal productivity of capital? a) 1 b) 2 C) 5 d) 6 8 3. Which of the following is not an assumption we make about perfectly competitive markets? a) Firms are price-takers b) Firms sell identical products c) Firms earn positive profit in the short-run but zero profit in the long-run d) Firms can freely enter or exit the market in the long-run e) All of the above are valid assumptions 4. We get a natural monopoly if the production of a good benefits from: a) Patent Protection b) Economies of scale c) Government licensing d) Diseconomies of scale e) a) and c) are correct

Answer 1

1> D

In the long run, in the presence of competition, all the firms produce at the lowest ATC, so the supply curve will be at the lowest ATC.

2> b

The marginal productivity of capital is the derivative of the output wrt capital, so it will be (K)^-0.5L = (16)^-0.5*8=8/4=2

3> c

It is not necessary that a firm will earn positive economic profit in the short run, so it is not a valid assumption of perfect competition.

4> B

If there is an economies of scales, it makes the ATC lower for a large player and this creates a natural monopoly.