Dr. Shishkin
ECON 2106
Assignment #21
ANSWERS
Perfect Competition, Part II
The above diagram shows the cost curves for a perfectly competitive wheat farmer.
1. At what price does the wheat farmer shut down?
When price drops to $2 per bushel, which min AVC
Questions 2 and 3: If the market price is $4 per bushel:
2. What is the profit maximizing level output in the short run (approximately)?
Price > min AVC, which means profit is at max when Q is approximately 36,000. This is
where MC=MR=price.
3. Is the economic profit in the short run positive or negative in this case?
Positive, because price > min ATC
Questions 4 and 5: If the market price is $2.5 per bushel:
4. What is the profit maximizing level output in the short run (approximately)?
Price > min AVC, which means profit is at max when Q is approximately 32,000. This is
where MC=MR=price.
Email me at [email protected], and text at (678) 524-5535 if I don’t respond
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Dr. Shishkin
ECON 2106
5. Is the economic profit in the short run positive or negative in this case?
Profit is positive, because price > min ATC
Questions 6 and 7: If the market price is $1.5 per bushel:
6. What is the profit maximizing level output in the short run (approximately)?
Price < min AVC, which means the company should shut down and set its output to zero.
7. Is the economic profit in the short run positive or negative in this case?
Economic profit is negative and equals to total fixed cost: profit = -$30,000
8. What is the major parameter of the industry firms’ cost structure that determines the
market price in the perfectly competitive industry in the long run?
Min ATC, which determined the market price in the long run.
9. Alice, Bud, and Celia can produce rubber bands in a perfectly competitive market. If
they enter the market, the minimum average total cost for a bundle of rubber bands, for
the three of them is $2, $3, and $4, respectively. If the market price is $2.10 per bundle,
who of these three people will enter the market?
Alice enter the market because her min ATC is smaller than the price, and she can make
positive economic profit.
10. Suppose a perfectly competitive market is in long-run equilibrium and then there is a
permanent technological improvement that positively affects productivity in the industry.
Explain what would happen at this market in the long run (refer to changes in the market
price, the economic profit made by firms, number of firms in the industry, supply in the
industry).
1)
2)
3)
4)
5)
min ATC goes down
existing firms start making positive economic profit
new firms are attracted to the industry
an inflow of new firms increases supply
an increase in supply reduces the market price to the new min ATC.
Email me at [email protected], and text at (678) 524-5535 if I don’t respond
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