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Perfect Competition: In-class Examples
1. Why would a firm that incurs losses choose to produce rather than shut down?
2. Bob’s lawn mowing service is a profit maximizing competitive firm. Bob mows lawns for
$25 each, and his total cost per day is $300, of which $50 is a fixed cost. Bob mows 11 lawns
per day. What can you say about Bob’s short-run decision regarding shut-down, and his longrun decision regarding exit?
3. In long-run equilibrium, all firms in the industry earn zero economic profit. Why is this true?
4. Suppose you are the manager of a watch making firm operating in a competitive market.
Your cost of production is given by TC = 100 + Q2. The marginal cost of production is 2Q.
The fixed cost of production is 100.
a) If the market price is $60, how many watches should you produce to maximize profit?
b) What will your profits be at p=$30?
5. The wheat industry is perfectly competitive. Each firm produces 12 million bushels of wheat
per year. The average cost per bushel of wheat is $6. The market price for each bushel of
wheat is $10. What is the marginal cost of a bushel of wheat? Is the industry in long run
equilibrium? Why or why not?
6. Consider the Table below which contains information about the costs for Barry’s baseball
manufacturing. If p = $3, complete the table. How much should Barry produce to maximize
profit? Is $3 per baseball a long-run equilibrium price in the market for baseballs? Explain
your answer. Suppose the market price falls to $2. Fill out the table and calculate how much
profit Barry makes. Does he continue to operate? Explain your answer.
Quantity
0
1
2
3
4
5
Total Cost
($)
1
2
4
7
11
16
MC
Total
revenue ($)
MR
Profit
7. Draw a diagram that represents the typical firm in a perfectly competitive market in long-run
equilibrium.