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Chapter 14

Firms in Competitive Markets

Educators

BM
EA

Problem 1

Many small boats are made of fiberglass and a resin derived from crude oil. Suppose that the price of
oil rises.
a. Using diagrams, show what happens to the cost curves of an individual boat-making firm and to
the market supply curve.
b. What happens to the profits of boat makers in the short run? What happens to the number of boat
makers in the long run?

BM
Ben M.
Numerade Educator

Problem 2

Bob's lawn-mowing service is a profit-maximizing, competitive firm. Bob mows lawns for \$27 each. His
total cost each day is \$280, of which \$30 is a fixed cost. He mows 10 lawns a day. What can you say about Bob's short-run decision regarding shutdown and his long-run decision regarding exit?

BM
Ben M.
Numerade Educator

Problem 3

Consider total cost and total revenue given in the following table:
$$\mathrm{Quantity} \quad 0\quad 1\quad 2\quad 3\quad 4\quad 5\quad 6\quad 7 $$
$$\mathrm{Total cost} \quad$8\quad 9\quad 10\quad 11\quad 13\quad 19\quad 27\quad 37 $$
$$\mathrm{Total revenue}\quad $0\quad 8\quad 16\quad 24\quad 32\quad 40\quad 48\quad 56 $$
a. Calculate profit for each quantity. How much should the firm produce to maximize profit?
b. Calculate marginal revenue and marginal cost for each quantity. Graph them. ($Hint$: Put the
points between whole numbers. For example, the marginal cost between 2 and 3 should be graphed
at 2 $1\over2$.) At what quantity do these curves cross? How does this relate to your answer to part (a)?
c. Can you tell whether this firm is in a competitive industry? If so, can you tell whether the industry
is in a long-run equilibrium?

BM
Ben M.
Numerade Educator

Problem 4

Ball Bearings, Inc., faces costs of production as follows:
a. Calculate the company's average fixed cost, average variable cost, average total cost, and marginal
cost at each level of production.
b. The price of a case of ball bearings is $50. Seeing that he can't make a profit, the chief executive
officer (CEO) decides to shut down operations. What is the firm's profit/loss? Was this a wise decision? Explain.
c. Vaguely remembering his introductory economics course, the chief financial officer tells the CEO
it is better to produce 1 case of ball bearings, because marginal revenue equals marginal cost at that quantity. What is the firm's profit/loss at that level of production? Was this the best decision? Explain.

BM
Ben M.
Numerade Educator

Problem 5

Suppose the book-printing industry is competitive and begins in a long-run equilibrium.
a. Draw a diagram showing the average total cost, marginal cost, marginal revenue, and supply
curve of the typical firm in the industry.
b. Hi-Tech Printing Company invents a new process that sharply reduces the cost of printing books.
What happens to Hi-Tech's profits and to the price of books in the short run when Hi-Tech's
patent prevents other firms from using the new technology?
c. What happens in the long run when the patent expires and other firms are free to use the
technology?

Jin-Hwan R.
Numerade Educator

Problem 6

A firm in a competitive market receives \$500 in total revenue and has marginal revenue of $10. What
is the average revenue, and how many units were sold?

Sandile N.
Numerade Educator

Problem 7

A profit-maximizing firm in a competitive market is currently producing 100 units of output. It has average revenue of \$10, average total cost of \$8, and fixed cost of $200.
a. What is its profit?
b. What is its marginal cost?
c. What is its average variable cost?
d. Is the efficient scale of the firm more than, less
than, or exactly 100 units?

Sandile N.
Numerade Educator

Problem 8

The market for fertilizer is perfectly competitive. Firms in the market are producing output but are currently incurring economic losses.
a. How does the price of fertilizer compare to the average total cost, the average variable cost, and the
marginal cost of producing fertilizer?
b. Draw two graphs, side by side, illustrating the present situation for the typical firm and for the
market.
c. Assuming there is no change in either demand or the firms' cost curves, explain what will happen
in the long run to the price of fertilizer, marginal cost, average total cost, the quantity supplied by
each firm, and the total quantity supplied to the market.

EA
Erwin A.
Numerade Educator

Problem 9

The market for apple pies in the city of Ectenia is competitive and has the following demand schedule: Each producer in the market has fixed costs of $9 and the following marginal cost:
a. Compute each producer's total cost and average total cost for 1 to 6 pies.
b. The price of a pie is now \$11. How many pies are sold? How many pies does each producer make?
How many producers are there? How much profit does each producer earn?
c. Is the situation described in part (b) a long-run equilibrium? Why or why not?
d. Suppose that in the long run there is free entry and exit. How much profit does each producer
earn in the long-run equilibrium? What is the market price? How many pies does each producer
make? How many pies are sold in the market? How many pie producers are operating?

EA
Erwin A.
Numerade Educator

Problem 10

An industry currently has 100 firms, each of which has fixed cost of \$16 and average variable cost as
follows:
a. Compute a firm's marginal cost and average total cost for each quantity from 1 to 6.
b. The equilibrium price is currently $10. How much does each firm produce? What is the total quantity supplied in the market?
c. In the long run, firms can enter and exit the market, and all entrants have the same costs as above.
As this market makes the transition to its long-run equilibrium, will the price rise or fall? Will the
quantity demanded rise or fall? Will the quantity supplied by each firm rise or fall? Explain your answers.
d. Graph the long-run supply curve for this market, with specific numbers on the axes as
relevant.

EA
Erwin A.
Numerade Educator

Problem 11

Suppose that each firm in a competitive industry has the following costs: $$\mathrm{Total cost}:\quad TC=50 +{1\over2},q^2$$ $$\mathrm{Marginal cost}: MC=q$$ where $q$ is an individual firm's quantity produced. The market demand curve for this product is $$\mathrm{Demand}: Q^D=120-P$$ where $P$ is the price and $Q$ is the total quantity of the good. Currently, there are 9 firms in the market.
a. What is each firm's fixed cost? What is its variable cost? Give the equation for average total cost.
b. Graph average-total-cost curve and the marginal-cost curve for $q$ from 5 to 15. At
what quantity is average-total-cost curve at its minimum? What is marginal cost and average
total cost at that quantity?
c. Give the equation for each firm's supply curve.
d. Give the equation for the market supply curve for the short run in which the number of firms is fixed.
e. What is the equilibrium price and quantity for this market in the short run?
f. In this equilibrium, how much does each firm produce? Calculate each firm's profit or loss. Is there incentive for firms to enter or exit?
g. In the long run with free entry and exit, what is the equilibrium price and quantity in this market?
h. In this long-run equilibrium, how much does each firm produce? How many firms are in the
market?

EA
Erwin A.
Numerade Educator