Leader: Veronica
Course: Econ 101
Instructor: Kreider
Date: 11-11-14
1. What are the four components of a Perfectly Competitive Market?
a.
b.
c.
d.
2. What is a Price taker and how does it apply to a perfectly competitive market?
Chapter 9
Perfectly Competitive Markets
Supplemental Instruction
Iowa State University
3. Fill in the Blank:
a. A perfectly competitive firm faces a demand curve that is
b.
c.
d.
e.
__________________________________ at the market price.
The firm chooses its profit-maximizing output level by increasing output
until marginal cost is ______________________. This is because in a
perfectly competitive firm market price is the same as _________________
Its short-run supply curve is that part of its MC curve that
____________________________________
A firm earns a profit whenever __________. Its total profit at the best
output level equals the area of a rectangle with height equal to the distance
between _________, and width equal to the _________________.
i. Graph an example of this
A firm suffers a loss whenever ___________at the best level of output. Its
total loss equals the area of a rectangle with height equal to the distance
between ______________, and width equal to the _____________.
i. Graph an example of this
Equation
Total Profit
Profit per unit
4. Identify whether the following describes a perfectly competitive market? If not, why?
a. In the market of soda pop, people would rather drink coke because they like the
taste better then that of Pepsi.
b. In the market of loose-leaf paper, people see no difference in different brands and
do not care which one they buy.
c. In town there are only two gas stations, people I the town do not have a
preference of wither gas station
d. Dell came out with a new handheld device to which it holds a patent, therefore is
legally the only one able to see the new product.
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5. Assume that the market for cardboard is perfectly competitive. In each of the
following scenarios, should a typical firm continue to produce or should it
shut down in the short run? Draw a diagram that illustrates the firm’s
situation in each case.
a. Minimum ATC = $2.00 Minimum AVC = $1.50
Market price = $1.75
b. MR = $1.00
Minimum AVC = $1.50
Minimum ATC = $2.00
6. Suppose that a perfectly competitive firm has the following total variable costs
(TVC): It also has total fixed costs (TFC) of $6. If the market price is $5 per unit:
Quantity:
TVC:
0
$0
1
$6
2
$11
3
$15
4
$18
5
$22
6
$28
a. Find the firm’s profit-maximizing quantity using the marginal revenue and
marginal cost approach.
b. Check your results by re-solving the problem using the total revenue and
total cost approach. Is the firm earning a positive profit, suffering a loss, or
breaking even?
7. Assume that the firm shown in the following table produces output using one fixed
input and one variable input.
Output
Price
0
Total
Marginal
Revenue Revenue
$50
$0
1
$50
2
$50
Total
Cost
$5
Marginal
Cost
Profit
$35
$15
$35
3
$50
$55
4
$50
$65
a. Complete this table and use it to find this firm’s short-run profit-maximizing
quantity of output. How much profit will this firm earn?
b. Redo the table and find the profit-maximizing quantity of output, if the price of
the firm’s fixed input rose from $5 to $10. How much profit will this firm earn
now?
c. Now redo the original table and find the profit-maximizing quantity of output,
if the price of the firm’s variable input rose so that MC increased by $20 at
each level of output. How much profit will this firm earn in this case?