How are firms doing at the equilibrium price, Macroeconomics

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

0

-

-

-

1

 

 

 

2

 

 

 

3

 

 

 

4

 

 

 

5

 

 

 

6

 

 

 

7

 

 

 

8

 

 

 

9

 

 

 

10

 

 

 

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

27

 

 

33

 

 

38

 

 

41

 

 

47

 

 

57

 

 

67

 

 

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

27

 

 

33

 

 

38

 

 

41

 

 

47

 

 

57

 

 

67

 

 

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

27

6500

33

6000

38

5500

41

5000

47

4500

57

4000

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?

Posted Date: 3/29/2013 6:20:38 AM | Location : United States







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