Use Figure 7-15 to answer the following questions.
1. How can you determine that the figure represents a graph of a perfectly competitive firm? Be specific; indicate which curve gives you the information and how you use this information to arrive at your conclusion.
MR is the key here. As MR is horizontal this is perfect competition. Such a curve makes every firma price taker, which is possible only in perfect competition.
2. What is the market price?
Market price is 40 - determined by intersection of MR and MC at point d. The price will be found on the demand curve corresponding to the equilibrium point.
3. What is the profit-maximising output?
It is determined by condition of MR=MC, when MC is rising. This happens at d where Q= 200
4. What is total revenue at the profit-maximising output?
Revenue at d = price *quantity = 200*40 =8000
5. What is the total cost at the profit-maximising output?
Total cost at d = ATC*Q= 24*200 = 4800
6. What is the profit or loss at the profit-maximising output?
Profits at d = total revenues – total cost = 8000-4800 = 3200.
7. What is the firm's total fixed cost?
TFC = AFC*Q. Since we dont know AFC at Q= 200 we use some other output level. This is because TFC is equal at all levels of output. Consider Q= 150 where ATC = 20 and AVC = 14 so that the difference = 20-14 = 6
TFC= 6*150 = 900
8. What is the total variable cost?
TVC= TC – TFC = AC*Q –TFC = 24*200 -900 = 3900
9. Identify the firm's short-run supply curve.
It is bcd- the MC above the minimum point of AVC is the supply curve.
10. Is the industry in a long-run equilibrium?
No because the firm is making abnormal profits as AC < P. In long run only normal profits are allowed.
Perfect Comnpetition in the Long run. (n.d.). Retrieved SEP 15, 2017, from Open.lib.umn.edu:
perfect competition. (n.d.). Retrieved Sep 19, 2017, from Staffwww.fullcoll.edu: