Perfect Competition.
a. What does it mean for a market to be perfectly competitive? What are the three conditions of perfect competition. What does it mean for firms to be 'price takers'?
b. Let's focus on just the per unit information from the table in question #1. Complete the table.
|
Total Product (Q)
|
Average Variable Cost
|
Average Total Cost
|
Marginal Cost
|
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0
|
-
|
-
|
-
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1
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2
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3
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4
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5
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6
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7
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8
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9
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10
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c. Suppose the market price of this product is $57. How much would a profit maximizing firm choose to produce? Calculate profits or losses.
Please note there are two ways to find the right answer to this questions. The hard way is to calculate total revenue, total cost and profit for each possible quantity and then pick the Q that yields the highest profit.
The easy way is to use marginal analysis. Since I'm going to ask you to do this several more times with different prices, I suggest you figure out the easy way.
|
Price
|
Quantity Supplied
|
Profit or Loss
|
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27
|
|
|
|
33
|
|
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38
|
|
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41
|
|
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47
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57
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67
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d. How high does the price need to be for firms to be able to make a profit? This is the long run shutdown price - if a firm can't make a profit it will shutdown at some point.
e. How low can the price go before a firm will shutdown immediately?
f. Now let's scale up from 1 firm to many firms. Suppose there are 500 identical firms competing in this industry. Complete the table (it's really a supply schedule).
|
Price
|
Quantity Supplied
|
Quantity Supplied by 500 firms
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27
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|
|
|
33
|
|
|
|
38
|
|
|
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41
|
|
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47
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|
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57
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67
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|
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g. Graph the industry supply curve with Q on the horizontal and P on the vertical.
h. Take the following data on demand and add it to your graph. Find the equilibrium price in this market.
|
Price
|
Quantity Demanded
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27
|
6500
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|
33
|
6000
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|
38
|
5500
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|
41
|
5000
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|
47
|
4500
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|
57
|
4000
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|
67
|
3500
|
i. How are firms doing at the equilibrium price? Are they earning profits or losing money? Do you expect the number of firms to rise or fall in this industry?