Chapter 5: Perfect Competition
1.
a) Perfect Competition
b) Oligopoly (Few sellers, decision of one seller largely affects the
others, requires large capital and not easy to enter or exit)
c) Monopolistic (There can be more picture framing shops and
each seller might provide slightly different services)
d) Perfect competition (As the exchange rate is determined by
market force.)
2.
a)
Price
Quantit TR
y
TC
MR
MC
AC
Profit
0
0
0
18
-
-
-
-18
0.49
100
49
41
0.49
.23
.41
8
0.49
200
98
57
0.49
.16
.29
41
0.49
300
147
76
0.49
.19
.25
71
0.49
400
196
112
0.49
.36
.28
84
0.49
500
245
175
0.49
.63
.35
70
0.49
600
294
330
0.49
.55
.55
-36
b) The gardener operates in perfect competition. Because in a perfect
competition the product
is standard with many close substitutes. And here the demand curve of the
market structure is
perfectly elastic meaning at one price quantity demanded is adjusted. Also
we can see the
table from “a” that Average Revenue/ price = marginal cost which refers to
the characteristics
of perfect competition.
c)
d) The profit maximizing or loss minimizing quantity is where marginal cost
= marginal revenue. Based on the table, the quantity is around 400 kg when
profit is 84.
3.
a)
(3)
TR
(6)
TC
(7)
AFC
(8)
AVC
(9)
AC
(10)
MC
0
254
63
304
2.82
0.56
3.38
0.56
119
324
1.49
0.41
1.91
0.25
182
371
0.98
0.45
1.43
0.52
210
403
0.85
0.50
1.34
0.80
238
492
0.75
0.70
1.45
2.23
b)
c) The profit-maximizing quantity of output is 260 since at this quantity the
MR = MC. Again, the firm is facing a loss of $190 ($182-$372) since the AC
is higher than the MR.
d) Breakeven point: At Quantity 300 because at that point the AC is the
lowest
Shutdown point: At quantity 340 because at that point the Price/MR = AVC
OR TR = VC
e) The business supply curve is the mc curve above the point where MC
and MR intersects
f) As the business progresses by increasing its output, the TR will increase
but will be below the VC as as the last quantity stated the TR = VC. So
eventually the business has to shut down.
4.
a)
1
Price
3
TR
4
FC
6
TC
7
AFC
8
AVC
9
AC
10
MC
4
0
100
100
-
-
-
4
100
100
210
4
4.4
8.4
4.4
4
248
100
262
1.62
2.61
4.22
1.41
4
320
100
320
1.25
2.75
4
3.22
4
440
100
480
0.9
3.45
4.35
3.33
4
560
100
800
0.71
5
3.71
10.67
b)
c) At 110 quantity. Loss of $40
d) The firm cant stay in the business in long run as the tr drops below the
vc
5.
a)
1
2
3
Price Quan TR
4
Fc
5
VC
6
TC
7
AFC
8
AVC
9
AC
10
MC
15
0
0
1500
0
1500
15
200
3000
1500
1700
3200
7.5
8.50
16
8.5
15
400
6000
1500
3000
4500
3.7
7.50
11.25
6.5
15
600
9000
1500
4700
6200
2.5
7.83
10.33
8.5
15
800
12000
1500
7100
8600
1.88
8.88
10.76
12
15
1000
15000
1500
10700
12200
1.5
10.7
12.20
18
b)
c) Profit maximizing output: 800
Profit: 3400
d) At every point TR is higher than VC so the business will sustain in the
long run.
6.
a)
Equilibrium price: $2.00
Equilibrium quantity: 60
If this represents long run equilibrium in the market, there will be no
economic profit as marginal cost will surpass the price.
b)
Price
D0
D1
S0
3.00
40
20
80
2.50
50
30
70
2.00
60
40
60
1.50
70
50
50
1.00
80
60
40
c)
7. In the context of firms and production, minimum cost pricing refers to
the idea that firms seek to minimize their production costs to maximize
profits. The invisible hand operates here as firms, driven by the profit
motive, strive to produce goods and services at the lowest possible cost.
Competition in the market encourages firms to innovate, find
cost-effective production methods, and utilize resources efficiently.
Marginal cost is the additional cost incurred by producing one more unit
of a good or service. In a competitive market, firms aim to set their prices
equal to the marginal cost. The invisible hand is at work when firms adjust
their production levels based on marginal cost. If the price is higher than
the marginal cost, other firms can enter the market, increasing
competition and driving prices down.
Adam Smith's notion of the invisible hand, as articulated in "The Wealth of
Nations," posits that individuals, driven by self-interest, unintentionally
contribute to the overall economic well-being of society through market
mechanisms. This concept finds resonance in the conditions of minimum
cost and marginal cost pricing. Minimum cost pricing reflects the pursuit
of profit maximization by firms, driving them to minimize production costs
through innovation and efficient resource utilization. In the competitive
market setting, marginal cost pricing aligns with the invisible hand as
firms set prices equal to the marginal cost, ensuring efficient resource
allocation. Both concepts emphasize self-interest, efficiency, and
competition as essential elements in guiding economic decisions and
resource allocation, providing a coherent framework in line with Adam
Smith's vision of the invisible hand operating within a market-driven
economy.