Download Chapter 11: Perfect Competition

Chapter 11: Perfect Competition
Chapter 11: Perfect Competition
Questions for Thought and Review
2.
Typical marginal cost, marginal revenue, and average total
cost curves are shown in the accompanying graph. The profitmaximizing level of output is Q*. The total profit is shown by
the shaded rectangle. As we have drawn it, the firm is not in
long-run equilibrium since it is earning a profit.
4.
The firm’s supply curve is that portion of the firm’s marginal cost curve that lies above
the minimum of the average variable cost curve. The sum of all individual firms’
marginal cost curves (above the minimum AVC curve) is the market supply curve.
6.
The shutdown point is the same as the point at which a firm exits a market in the long run
when there are no fixed costs—that is, when AVC are the same as ATC.
8.
A technological development that shifts the MC curve down will shift the market supply
curve to the right. Market price will fall and output will rise. Profit for each firm will still
be zero because the price will decline sufficiently so that each firm earns zero profit.
10.
If both firms are producing where MR = MC and we could buy either for the same
amount, we should buy the one with the highest total profit. Remember, it is total profit,
not profit per unit that is maximized by a firm. If there are perfectly competitive firms,
however, eventually both will earn 0 economic profits regardless of which we bought.
12. a. Firstly, the average total cost curve is mislabeled as the average fixed cost curve. With
that correction, the profit maximizing output level is not where MC = ATC as indicated,
but rather where MC = MR.
b. Firstly, the demand curve facing a single firm in a competitive market is perfectly elastic
(horizontal) instead of upward sloping. Secondly, the firm's supply curve is that portion
of the marginal cost curve that is upward sloping; the MC curve should be shown to be
upward sloping.
c. As with (b), the demand curve facing a single firm in a competitive market is horizontal
instead of downward sloping. Secondly, the profit maximizing level of output is not
where MC = AVC, but where MC = P = MR. Third, the MC curve should go through the
minimum point of the ATC curve. It currently doesn’t.
d. This graph would never represent any real firm since the firm would have shut down
where ATC = P. Output should be zero. Also the ATC curve cannot be below the AVC
curve.
Chapter 11: Problems and Exercises
14. a. To maximize profits, a competitive firm should produce where MR = MC (and MC are
rising). This is between 4 and 5.
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Chapter 11: Perfect Competition
b. If the price of the good increased to $15, MR would also increase to $15, and the profit
maximizing level of output would increase to between 5 and 6.
16.
If this situation refers to the output level at which MR = MC, the price covers the AVC of
$4, but only half of the AFC; in the short run the farmer should still grow wheat. By
producing he will lose $2 per unit, but if he did not produce he would lose $4 per unit. In
the long run the farmer will go out of business.
18. a. The market equilibrium price and the price that each firm gets for its product is $14.
b. The market equilibrium quantity is 50 units. Each firm produces 5 units.
c. Each firm is making $17 total profit.
d. Firms will begin to exit the market when the price falls below $9.75, the minimum average
total costs.
20. a. Once the new tomato is generally available, it will likely reduce the price of equal-quality
tomatoes in the off-season. However, the new, higher-quality tomato may well sell for
more than the cardboard-tasting ones normally bought in winter.
b. Its effects on farmers depend on what the biotechnology firm charges for its seeds. If the
prices for the seeds are high enough to extract the benefit of the better tomato, farmers
will be no better off. Further, because the demand for tomatoes is fairly inelastic, the
increased supply of good tomatoes (reducing their price) in the off-season will reduce
revenues of farmers.
c. Tomatoes will be grown in areas much farther from their point of sale.
d. To the degree that the price of tomatoes falls, tomatoes in the winter will more likely be
moved from the rear to the front of the salad bar because they won’t be as expensive for
the restaurant to supply.
22. a. As demand decreases, price will decrease in the short run. As price declines, some firms
will exit the market. As firms exit, market supply will decrease, which will cause price to
rise. Because it is a decreasing cost industry, however, marginal costs will be lower than
with the original equilibrium and the price at which zero profit is made falls. Market
equilibrium price falls in the long run.
b. The market equilibrium quantity falls.
c. The number of firms also falls because the decrease in demand decreased economic
profits, which causes firms to exit the market.
d. Profit per firm returns to zero for all firms, and for the industry in the long run.
Price
24. a. Because Americans will be able to import more from China, Mexico will likely face a
decline in the demand for its textiles. The demand curve will shift to the left and
equilibrium price and quantity will decline (to P1 and Q1 respectively). In the long run
some businesses will exit the market. Because we are
assuming an increasing-cost industry, as some firms exit
S1
the market, costs of production decline, which shifts the
average total cost curves of the remaining firms down. The
P1
supply curve will shift to the left (to S1), raising
P0
equilibrium price back up (to P2), but not back to its
original level. Equilibrium quantity will fall even further to
Q2, as shown in the accompanying graph.
b. The imposition of a new tax will shift the supply of French
restaurants up because the tax increases their costs. In the
Q1 Q0
S0
D0
Quantity
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Chapter 11: Perfect Competition
short run, equilibrium price will rise (to P1) and equilibrium quantity will fall (to Q1). For
some firms the price increase will not be sufficient to cover the increase in taxes in the
long run. This is also the long-run equilibrium.
Chapter 11: Web Questions
2.
One possible answer is, Vermont 7.5%; New Jersey 7.5%; California 6.64%; South
Dakota 8.1%; Alabama 7.25%.
a. 6.64%-8.1%, a wide range.
b. Both buyers and sellers are price takers, there is a large number of firms, there is a
homogeneous product, there are profit-maximizing entrepreneurial firms. It may appear
that sellers are price makers because they are posting their rates, but they face many
competitors. Their posted prices are set by the market. There is a lack of complete
information and some barriers to entry (cost to establishing a lending institution).
c. Very few markets are perfectly competitive. Because the auto loan market doesn’t meet
all six conditions, it isn’t surprising that there is a spread of loan rates.
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