PROBLEM SET 11
1. Suppose your study partner constructed a list of the following conditions of a perfectly
competitive market. Circle those that he got correct and fix those that he got wrong.
There are many barriers to entry.
Firms are price makers.
Firms’ products are differentiated.
There is complete information.
Firms maximize market share.
The number of firms is large.
2. Given the marginal cost information below, answer the following questions:
Output
1
2
3
4
5
6
7
Marginal costs
15
12
20
27
34
40
47
a. The firm can sell a helmet for $34 and the
firm is producing 6 helmets. Would
increasing output increase or decrease profit?
b. The firm can sell a helmet for $34 and the
firm is producing 4 helmets. Would
increasing output increase or decrease profit?
c. The firm can sell a helmet for $34. What is the profit-maximizing level of output?
3. Why is the marginal revenue for a firm in perfect competition equal to the market price?
4. Briefly explain why the following statements are either TRUE or FALSE:
a. Perfectly competitive firms can never earn economic profit.
b. Perfectly competitive firms seek to maximize both per-unit and total profit.
5. The following graph shows cost curves for a perfectly competitive firm in a constant-cost industry.
a. Give the actual names of curves A, B, and C.
b. If the market price falls below ________ this firm will be suffering economic losses.
c. If the market price falls below ________ this firm will choose to shut down in the short run.
d. If the market price were $8, this firm would be earning approximately ________ in economic
profit.
e. In the long run, this firm will produce ________ units of output.
6. Based on the following table, what is the profit maximizing output?
Output
0
1
2
3
4
5
6
7
8
9
10
Price
10 TL
10 TL
10 TL
10 TL
10 TL
10 TL
10 TL
10 TL
10 TL
10 TL
10 TL
Total Costs
31 TL
40
45
48
55
65
80
100
140
220
340
b. How would your answer change if in response to an increase in demand, the price of the
good increased to 15 TL?
7. Each of 10 firms in a given industry has the costs given in the left-hand table below. The
market demand schedule is given in the right-hand table.
Output Total Costs
Price
Quantity
Demanded
0
12 TL
2
110
1
24
4
100
2
27
6
90
3
31
8
80
4
39
10
70
5
53
12
60
6
73
14
50
7
99
16
40
a. What is the market equilibrium price and the price each firm gets for its product?
b. What is the equilibrium market quantity and the quantity each firm produces?
c.. What profit is each firm making?
d. Below what price will firms begin to exit the market?
8. A farmer is producing where MC=MR. Say that half of the cost of producing wheat is the
rental cost of land ( a fixed cost) and half is the cost of labor and machines (a variable cost). If
the average total cost of producing wheat is 8 TL and the price of wheat is 6 TL, what would
you advise the farmer to do? (‘Grow somethingelse is not allowed)
9.
Refer to the graph shown. What distance represents average profits?
A. AB
B. BF
C. AF
D. FW
10.
Refer to the graph shown. If the market price is P4, the firm will produce:
A. Q2 and incur a loss.
B. Q3 and break even.
C. Q3 and earn a profit.
D. Q4 and earn a profit.
11. Refer to the graph in question 10. If the market price is P4, the maximum profit the firm can earn
is:
A. Q4 multiplied by P4.
B. Q3 multiplied by P3.
C. Q4 multiplied by the difference between P4 and P3.
D. Q3 multiplied by the difference between P3 and P2.
12.
Refer to the graph shown. Assuming that the industry continues to operate under conditions of
perfect competition and that the cost curves do not shift, in the long run this firm will produce:
A. 800 units of output.
B. 1,000 units of output.
C. 1,200 units of output.
D. 1,400 units of output.
13. Refer to the following graphs.
Explain what is happening in each graph above, are there profits to be made, at what level of
output? .Say if it applies to short or long run.