Competitive markets: answer guide

1. C = 600 + 3 q + 6 q² ; MC = 3 + 12 q

a. VC = 3q + 6 q2  ( q squared)

b. FC = 600

c. ATC = 600/q + 3 + 6 q

d. set p = 101 = 3 + 12 q and solve for q; 12 q = 98; etc....

if economic profits are positive (SR); firms will enter the market in the long run

e. find "q" such that ATC = MC; zero profit requires p = ATC so you know the price and q.

2. SR as long as price is greater than AVC firm looses less by operating than shut down

3. remember the market demand curve is based upon the theory of the consumer, i.e. it is downward sloping. why??? the individual firm in a competitive market just sells at the market price; i.e. faces a perfectly elastic demand curve.

4. C = 100 + q² ; MC = 2q

a. p = 60 = 2 q ....... q = 30

b. profit = TR – TC = 60(30) - [ 100 + (30)²] = 1800 – 1000 = 800

c. what (about) is the minimum price necessary for a firm to produce?

find AVC = MC

5.

a.    Set Qd = 100,00 - 2,000 P = -10,000 + 1,000P = Qs

                        110,000 = 3,000 P

                            P = 110,000/3,000 = 36.666 = 37

                            @ P = 37; Qd = Qs = 26,000

b.    free trade price = $ 24 per dozen; Domestic consumption = 100,000 - 2,000(24) = 52,000

        Domestic production = -10,000 + 1,000 (24) = 14,000

        Imports = 52 - 14 = 38,000

c.    New price = 24 + 6 = $30/dozen; Cons. = 40,000; Prod. = 20,000; Imports = 20,000

d.    Draw the diagram and fill in all appropriate areas.