Homework 5

Profit Maximizing in Purely Competitive Markets

Question 1: In the following table, calculate total revenue and marginal revenue for each level of sales:

Product Price	Quantity Demanded	Total Revenue	Marginal Revenue
$10	0
10	2
10	4
10	6
10	8
10	10
10	12

Question 1a: What kind of industry does the table represent?How can you tell?

Question 1b: Graph the demand, TR, and MR curves.

Question 1c: The Demand and Marginal revenue curve are equal.Why?

Question 1d: What is the relationship between Marginal Revenue and Total Revenue?

Question 2: It may be better to stay in business in the short run even if a firm is losing money. When is this true? What is the most you should ever lose?

Question 3: The following is data for a purely competitive producer:

Total Product	Average Fixed Cost	Average Variable Cost	Average Total Cost	Marginal Cost
0	0	0	0	N/A
1	90.00	100.00	190.00	100.00
2	45.00	72.00	117.00	69.00
3	30.00	68.00	98.00	60.00
4	22.50	63.00	85.50	48.00
5	18.00	57.50	75.50	35.00
6	15.00	58.25	73.25	62.00
7	12.86	60.10	73.10	72.21
8	11.25	62.94	74.32	82.81
9	10.00	66.00	76.11	90.51
10	9.00	69.86	78.86	103.57

Question 3a: At a product price of $85, will this firm produce in the short run?If they produce, what is the profit-maximizing or loss-minimizing output? What is the total economic profit (loss) that the company will realize?

Question 3b: Answer the questions on 3a with the new product price of $62

Question 3c: Answer the questions on 3a with the new product price of $70

Question 3d: Use the table from question 3 to complete the short-run supply schedule for a single firm (Column 2) and calculate profit or loss amount at each output (Column 3).

(1) Price	(2) Quantity Supplied, Single Firm	(3) Profit (+) Loss (-)	(4) Quantity Supplied, 1500 firms
52.00
57.00
64.00
68.00
73.00
83.00
93.00

Question 3e: Now, assume there are 1500 identical firms in this competitive industry. Complete the industry supply schedule above (Column 4).

Question 3f: Suppose the market demand data for the product is as follows:

Price	Total Quantity Demanded
52.00	14500
58.00	11000
64.00	9500
68.00	9000
73.00	8000
83.00	6500
93.00	4000

Question 3g: What will be the equilibrium price? _______

Question 3h: What will be the equilibrium output for the industry? ________

Question 3i: For each firm? __________

Question 3j: What will be the profit or loss per unit?____________

Question 3k: Profit or loss per firm? ___________

Question 3l: Will the industry expand or contract in the long run? ____________