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ECN 112
PRINCIPLES OF MICROECONOMICS
CHAPTER 12 PRACTICE PROBLEMS
This is NOT a homework assignment.
It is just practice to help you become familiar with the Chapter 12 material.
There is no homework for Chapter 12, but this material will be on the Final.
1.
Draw a graph showing a firm that is operating at a loss in a perfectly competitive
market. Be sure your graph includes the firm’s demand curve, marginal revenue
curve, marginal cost curve, average total cost curve, and average variable cost
curve. Be sure to indicate the area representing the firm’s loss.
2.
Frances sells earrings in the perfectly competitive earrings market. Her output per
day and her costs are as follows:
Output per Day
0
1
2
3
4
5
6
7
8
9
Total Cost
$ 1.00
2.50
3.50
4.20
4.50
5.20
6.80
8.70
10.70
13.00
(a) If the current equilibrium price in the earring market is $ 1.80, how many earrings will
Frances produce, what price will she charge, and how much profit (or loss) will she
make? Draw a graph to illustrate your answer. Your graph should be clearly labeled and
should include Frances’s demand, ATC, AVC, MC, and MR curves; the price she is
charging; the quantity she is producing; and the area representing her profit or loss.
(b) Suppose the equilibrium price of earrings falls to $ 1.00. Now how many earrings
will Frances produce, what price will she charge, and how much profit or loss will she
make? Show your work. Draw a graph to illustrate this situation, using the same
instructions from part (a).
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(c) Finally, suppose the equilibrium price of earrings falls to $0.25. Now how many
earrings will Frances produce, what price will she charge, and how much profit or loss
will she make?
3.
What is the difference between a firm’s shutdown point in the short-run and in the
long-run? Why are firms willing to accept losses in the short-run but not in the
long-run?
4.
Edward produces table lamps in the perfectly competitive desk lamp market.
(a) First, fill in the missing values in the following table:
Output per
Week
0
1
2
3
4
5
6
7
8
9
10
Total Cost
AFC
AVC
ATC
MC
$ 100
150
175
190
210
240
280
330
390
460
540
(b) Suppose the equilibrium price in the desk lamp market is $ 50. How many table
lamps should Edward produce, and how much profit will he make?
(c) If next week the equilibrium price of desk lamps drops to $ 30, should Edward shut
down? Explain.
5.
A student in a principles of microeconomics course makes the following remark:
The economic model of perfectly competitive markets is fine in theory but not
very realistic. It predicts that in the long-run, a firm in a perfectly competitive
market will earn no profits. No firm in the real world would stay in business if it
earned zero profits.
Do you agree with this statement?
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