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P10.1 SOLUTION
A. False. In long-run equilibrium, every firm in a perfectly competitive
industry earns zero economic profit. For long-term viability, firms in
competitive markets must earn a normal rate of return on investment.
B. True. Perfect competition exists in a market when individual customers
and individual firms have no influence over price. In such markets,
both customers and firms take prices as given.
C. False. Profit maximization requires that a firm operate at the output
level at which marginal revenue and marginal cost are equal. With
price constant, average revenue equals marginal revenue. Therefore,
maximum profits result when market price is set equal to marginal cost
for firms in a perfectly competitive industry.
D. True. Downward sloping demand curves follow from the law of
diminishing marginal utility and characterize both competitive markets.
E. True. Normal profit is defined as the rate of return necessary to retain
and attract needed capital investment. Economic profit represents an
above-normal rate of return. The firm incurs economic losses whenever
it fails to earn a normal profit. A firm might show a small accounting
profit but be suffering economic losses because these profits are
insufficient to provide an adequate return to the firm's stockholders. In
such instances, firms are unable to replace plant and equipment and
will exit the industry in the long run.