1. Art's Garage operates in a perfectly competitive market.

At the point where marginal cost equals

marginal revenue, ATC = $20, AVC = $15, and the price per unit is $10. Given this situation, in the short
run

a) Art will break even.

b) Art will shut down immediately.

c) Art will shut down, but only after the lease on the garage expires.

d) Art will sustain losses in the short run but will continue to operate.

1. What is the exit price of the firm in the long run?

a) $3

b) $5

c) $8

d) $10

1. In a perfectly competitive market, if the market price of the good is $13, how many units will be
produced by the firm?

a) 8 units

b) 12 units
 c) 14 units

d) There is not enough information to determine the level of output.

1. How many units of output will be supplied to the market

if there are 500 identical firms and a market price of $4.00?

a) 120,000

b) 180,000

c) 240,000

d) 300,000

A: Since P = 4 and each firm produces 600 market’s output= (600)(500)=300,000

1. The entry decision for a firm in a competitive market

in the long run depends on if

a) price is less than average total cost.

b) total revenue is less than total cost.

c) price is greater than average total cost.

d) price is equal to marginal cost.

Perfect Competition. Suppose a firm's marginal cost of producing q units is MC = 8 + 8q. The industry
demand curve is given by P = 488 – QD (where quantity is given in thousands of units).

If the firm operates in a perfectly competitive industry and the price of the good is $200, what is this
firm’s optimal short-run quantity?

a) 196 units

b) 24 units

c) 48 units

d) 192 units

A= Remember the optimal condition is P=200=MC=8+8q

 q= 192/8=24 units

If the firm operates in a perfectly competitive industry and the price of the good is $200, how many
firms produce this good in the short run?

a) 1 firms

b) 12 firms

c) 24 firms

d) 288 firms

Since P=200= 488-QD QD= 288 is the industry demand. Since all firms are the same then Number of
firms= QD/firm-level output= 288/24= 12 firms

The supply curve of the competitive firm is its average total cost curve.

a) True

b) False

A = False. Remember the supply curve comes from equating P= MC. In the short run, it is just the
segment of the MC above the AVC, whereas in the long term it is just the one above the ATC
Fruity Apples is the monopolist in the market for apples. The following equations describe the
demand, the marginal cost, and the total cost, where Q is output in pounds and P is price per
pound.
Demand: P = 51 - Q Marginal cost: MC = 1 + 4Q Total cost: TC = Q + 2Q^2
What would the equilibrium price and quantity be if this market was perfectly competitive?
a) P = $41 and Q = 10 pounds

b) P = $10 and Q = 41 pounds

c) P = $30 and Q = 21 pounds

d) P = $21 and Q = 30 pounds

Problems and Applications (From Chapter 13)

1. Suppose the market for bottled water and the market for soft drinks both have large numbers
of buyers and sellers. Which of these markets is likely to be more competitive? [LO 13.1]

Answer: If both markets meet the characteristic of large numbers of buyers and sellers, the
market for bottled water would more competitive than the market for soft drinks because
bottled water is more of a standardized good.

3. Select all that apply. In a perfectly competitive market, MR equals: [LO 13.2]

a. Price
b. Average revenue
c. Total revenue
d. Δ in total revenue / Δ in quantity

Answer: a, b, and d.

4. Dani sells roses in a competitive market where the price of a rose is $8. Use this information

to fill out the revenue columns in Table 13P-1. [LO 13.2]

Answer:
 Total revenue = Price × Quantity.

Average revenue = Total revenue/Quantity.

Marginal revenue has multiple definitions in a competitive market:

MR = Change in total revenue/Change in quantity.

Marginal revenue of third rose = ($24 – $16)/ (3 – 2) = $8

MR = Price = $8.

MR = Average revenue = $8

5. On Figure 13P-1, show the profit-maximizing quantity when price is P1. Label this point
Qmax1. Show the profit-maximizing quantity when price is P2. Label this point Qmax2.
[LO 13.3]

Answer: The profit-maximizing quantity occurs where marginal revenue intersects marginal
cost.

6. Figure 13P-2 shows the marginal cost curve for a firm in a competitive market. The market
price is $24. Plot this firm's profit-maximizing price and quantity. [LO 13.3]

Answer: The profit-maximizing quantity occurs where marginal revenue intersects marginal
cost. For competitive firms, MR = Price. A horizontal line at a price of $24 intersects
marginal cost where Q = 30.
7. Paulina sells beef in a competitive market where the price is $6 per pound. Her total revenue
and total costs are given in Table 13P-2. [LO 13.3]

a. Fill out the table.

b. At what quantity does marginal revenue equal marginal cost?
c. What is the profit-maximizing quantity?

Answer:
a. Profit = Total revenue – Total cost.
For competitive firms, marginal revenue = price.
Marginal cost = Change in total cost/Change in quantity.
Marginal profit = Change in profit/Change in quantity.
 b. Marginal revenue equals marginal cost at a quantity of 4 pounds.

c. The profit-maximizing quantity is where marginal revenue intersects marginal cost. This
occurs at 4 pounds.

8. The data in Table 13P-3 are the monthly average variable costs (AVC), average total costs
(ATC), and marginal costs (MC) for Alpacky, a typical alpaca wool manufacturing firm in
Peru. The alpaca wool industry is competitive.

For each market price given below, give the profit-maximizing output quantity and state
whether Alpacky’s profits are positive, negative, or zero. Also state whether Alpacky should
produce or shut down in the short run. [LO 13.4]
Answer:
Profit (+,
Market Price Qmax Produce in SR? (Y/N)
−, 0)

a. $22.00 5 Positive Yes

b. $18.00 4 Negative Yes

c. $16.00 5 Positive No

a. At a price of $22, MR = $22. The profit-maximizing quantity occurs where MR = MC. When MC =
22, Q = 5. At Q = 5, the price is greater than ATC. This indicates that profits are positive. Because
profits are positive, the firm should produce in the short run.

b. At a price of $18, MR = $18. Again, the profit-maximizing quantity occurs where MR = MC. When
MC = 18, Q = 4. At Q = 4, the price is less than ATC (ATC = $19.50 and Price = $18). This indicates
that profits are negative. When profits are negative, the firm must decide whether or not to
produce in the short run. A firm will produce in the short run if the price is greater than AVC.
When Q = 4, AVC = $17. Because the price is greater than AVC, this firm will produce in the short
run. (It may choose to exit in the long run.)

c. At a price of $16, MR = $16. Again, the profit-maximizing quantity occurs where MR = MC. When
MC = 16, Q = 3. However, at Q = 3, the price is less than ATC (ATC = $20 and Price = $16). This
indicates that profits are negative. As mentioned in part b, when profits are negative, the firm
must decide whether or not to produce in the short run. A firm will produce in the short run if
the price is greater than AVC. When Q = 3, AVC = $16.70. Because the price is less than AVC, this
firm will choose to not produce in the short run. By not producing, the quantity produced is
zero. Thus, we must revise our previous answer to Qmax to reflect this choice. Qmax = 0 at a price
of $16.
9. The marginal costs, average variable costs (AVC), and average total costs (ATC) for a firm
are shown in Figure 13P-3. In the figure, mark the quantity the firm will choose to produce in
the short run given this cost structure and the market price. Does the firm earn positive or
negative profits? Graph the area that defines the firm’s profit (or loss) at this rate of output.
[LO 13.4]

Answer: The loss minimizing output occurs where MC = MR.

Profit = (P – ATC) × Q. Because profit is negative, the firm experiences a loss.

10. The marginal costs, average variable costs (AVC), and average total costs (ATC) for a firm
are shown in Figure 13P-4. In the figure, mark the quantity the firm will choose to produce in
the short run given this cost structure and the market price. Does the firm earn positive or
negative profits? Graph the area that defines the firm’s profit (or loss) at this rate of output.
[LO 13.4]

Answer: The profit maximizing output occurs where MC = MR, shown at point A.

Profit = (Price – ATC) × Q. Because profit is positive, the firm experiences a gain.
11. The cost curves for an individual firm are given in Figure 13P-5. [LO 13.4]
a. In Figure 13P-5 (A), highlight the firm’s short-run supply curve.
b. In Figure 13P-3 (B), highlight the firm’s long-run supply curve.

Answer:
a. The firm's short run supply curve is given by marginal costs equal-to or greater-than
AVC (blue curve).

b. The firm's long run supply curve is given by the level of output at the minimum of ATC
(orange curve).

12. Suppose the quantity of apples supplied in your market is 2,400. If there are 60 apple
producers, each with identical cost structures, how many apples does each producer supply to
the market? [LO 13.5]

Answer: If producers have the same cost structure, they are all profit maximizing at the same
output level. Therefore, you can divide the total market supply by the number of firms to get
the quantity supplied by each firm: 2,400/60 = 40. Each producer supplies 40 apples to the
market.