ECON 213 InQuizitive 9 Firms in a Competitive Market Assignment solutions complete answers Imagine a perfectly competitive market where all the firms have the cost structure shown below. Where will the long-run equilibrium market price settle? To maintain the goal of maximizing profits, as conditions and new information change, firms typically adjust production decisions based on marginal revenue and cost, rather than total revenue and cost. The following graphs model adding individual firms’ supply curves to obtain a market supply curve. Which of the following explains why the graph on the left is correct and the graph on the right is incorrect? Consider a fish vendor selling salmon in a competitive market. A single fish vendor will be able to sell his salmon at a higher price than his competitors and affect the market price of fish. Consider the following information for a fictional firm. Changes in profit comes from selling one more unit (and receiving MR) minus the cost of producing this additional unit (MC). Fill in the blanks to complete the sentence about production. Quantity produced (units) Sharifa runs a profit-maximizing ice cream shop where she sells her famous chocolate-fudge banana sundaes. Sharifa has taken a microeconomics course, so she knows to produce at the optimal output. Based on the information shown in the graph, what is Sharifa’s total profit? Assume all firms represented in the graph have the same cost functions and that they begin at a long-run equilibrium. Now suppose that a large number of new consumers enter the market. Which of the following would be the correct order of steps to represent this change in the market and that would result in long-run equilibrium? In a perfectly competitive market, the long-run market supply curve tends to be horizontal or nearly so (very price sensitive). What is another way to state this fact? The short-run supply curve for a firm in a competitive market (as shown in the graph) will start at a market price of $4. Consider a profit-maximizing firm in the short run which chooses to remain open while it is losing money. Place the following values in order from lowest to highest to represent a firm in this situation. Which descriptions apply to the long-run equilibrium in a perfectly competitive market? The following graphs represent a given market and a firm within the market. Suppose there is a decrease in the market demand. With a beginning point of a long run equilibrium, select three points, two in Figure (a) and one in Figure (b), that represent a market in the middle of adjusting to a decrease in market demand in the short run. Reece prepaid for a trip over spring break in 2020, right before major cities started to issue lockdown mandates due to rapid spread of the coronavirus. Given all the uncertainty around travel and disease spread, she tried to get a refund, but was told it was too late. She felt very uncomfortable going and knew she would not enjoy her trip at all. Therefore, she made new plans to spend spring break on campus binge-watching her favorite TV shows. An economist would explain Reece’s decision to be –Press Space to open Fill in the blanks to complete the passage regarding sunk costs for a manufacturer of ethanol. Ethanol, a biofuel derived from corn, is used in the production of both gasoline and pharmaceutical-grade hand sanitizer. During the pandemic, as the demand for gasoline plummeted, several producers of ethanol retrofitted their plants by purchasing new capital in order
to produce a higher-quality ethanol, which could be used to make a medical-grade hand sanitizer. Future decisions about whether to produce ethanol for gasoline or for hand sanitizer –Press Space to open Of the four quantities shown, assuming the market price remains the same, select the output that leads to a normal profit or break-even point. (Keep in mind that this concept is different from the profit-maximizing output.) The cost and revenue information for a firm is shown in the figure below. Select the regions whose combined area represents the firm’s profit when MR = MC. Place the following U.S. markets in order from least competitive to most competitive. Sahara, a popular YouTuber, now works from home. Before the pandemic she was a local high school teacher who made $68,500 per year and rented out her garage to a local artist for $1,000 a month. Her video on making DIY hand sanitizer went viral, and she now has a lucrative contract that pays her $7,800 per month in advertising fees. Sahara can no longer teach and is now using her garage as her warehouse. In addition to the monthly income she collects from advertisers on her YouTube channel, she was also able to sell $42,000 in hand sanitizer. Her total expenses were $57,000 for supplies. Calculate Sahara’s yearly accounting profit. The profit-maximizing rule leaves room for cases where it is both possible and reasonable for a firm to operate at a loss over the long run. Identify the characteristics that describe a competitive market or a “price taker” firm within the market. As the graph below illustrates, the long-run supply curve for a single firm, SLR, is vertical below the dashed line and coincides with the MC curve above the dashed line. What does this mean? The following options describe costs incurred by owners of a given business. Identify which would be considered a sunk cost for a firm that is considering exiting a market. At a market price of $10, the profit-maximizing output for Mr. Plow is 9 driveways. Which of the following conditions are true when a firm is maximizing its profits? Firms typically make production decisions based on marginal revenue and cost, rather than total revenue and cost. There are many in a competitive market. Firms in this market sell very products, and each firm also has to the market. Each firm is also considered a price . Consider the following information for a fictional firm. The change in profit is MR – MC, the difference one more unit sold makes to total profit. The firm should produce – The cost and revenue information for a firm is shown in the figure below. Click the regions whose combined area represents the firm’s profit when MR = MC. Select the quantity on the graph that will maximize the profits for the perfectly competitive producing firm. Which of the following conditions hold for a firm maximizing its profits? Fill in the blanks to complete the statement about competitive markets. Competitive markets have many –, firms with – products, – for firms, and firms that are price –. Fill in the blanks to complete the passage about profits and losses in a perfectly competitive retail market in the long run. When – firms are making a profit, this is a signal to other firms to enter the market. The result is increased –, which leads to a reduction in price and therefore a reduction in profit. In long-run equilibrium, – profit is zero; there is no signal to enter and no signal to –. Relative to other market structures, perfectly competitive markets have which of the following properties? Order the following U.S. markets from least competitive to most competitive. Standard profit-maximizing theory leaves room for cases where it is both possible and reasonable for a firm to operate at a loss over the long run. An ice-cream street vendor operates out of a small truck. He considers replacing the truck with a larger one but decides not to. Apply the appropriate label to each cost. Fill in the blanks to complete the statement about positively sloped long-run market supply curves. In the simplest kind of case, the long-run market supply curve is perfectly –. However, more realistically it may slope –, if increasing the – leads to increased production costs, due to shortages in either material or –. A firm regulates its production so that marginal cost (MC) matches marginal revenue (MR). Drag each descriptive phrase into the appropriate region of the figure. Of the four quantities shown, choose the one that leads to a normal profit or break-even point. Identify the characteristics of markets with perfect competition. Firms produce differentiated products. There is a large number of firms. Firms produce very similar products. Firms have no price control. Firms are very small relative to the market. There are significant barriers to entry and exit to the market. Firms have significant price control. Drag the labels into place in the figure for a market leaving, and then returning to, equilibrium as firms exit after a decrease in demand. Click on the three points, two in Figure (a) and one in Figure (b), that represent a market in the middle of adjusting to a decrease in market demand. Fill in the blanks to complete the passage about short-run operating loss. In the short run, a profit-maximizing firm should operate even when it is losing money, so long as the market –Press Space to open In this particular market, there has been a short-run decrease in demand. As a result, a number of firms have left the market, which causes supply to fall and prices to rise once again to long-run market equilibrium. Drag the labels into place in the figure for an individual firm that is returning to equilibrium price after a short-run fall in demand. Which descriptions apply to market equilibrium? Firms in the market have no incentive to exit. No “exit” or “enter” signals are being sent. Firms outside the market have no incentive to enter. Accounting profit is zero. Economic profit is zero. On the left is the correct way for a perfectly competitive market to add two individual firms’ supply curves to obtain a market supply curve. Why is the method on the right incorrect? Use the figure to calculate the maximum possible profit for the firm whose marginal revenue (MR), marginal cost (MC), and average total cost (ATC) are functions of production quantity Q as shown. Consider a fish vendor in a competitive market. This fish vendor is able to sell his fish at a higher price than his competitors and affect the market price of fish. Fill in the blanks to complete the passage about the figure. In the short run, some costs are fixed and the rest are variable. A firm will continue production only so long as it can cover at least its – costs. Therefore, no units will be supplied except where marginal revenue – average variable cost. Where that condition is met, the (short-run) supply curve – the marginal cost curve, because marginal cost equals marginal revenue. In the short run, some costs are fixed and the rest are variable. A firm will continue production only so long as it can cover at least its – costs. Therefore, no units will be supplied except where marginal revenue – average variable cost. Where that condition is met, the marginal cost curve – the short-run supply curve, because it is only along this line that marginal cost equals marginal revenue. In a perfectly competitive market, the long-run market supply curve tends to be horizontal or nearly so. What is another way to state this fact? Place in order the events that take place in the long run, in a perfectly competitive market, when quantity supplied is greater than quantity demanded. A manufacturer of consumer electronics anticipates that due to a temporary spike in production cost, it will operate at a slight loss for three quarters (nine months) before returning to profitability. Nonetheless, the firm plans to keep production levels at the point where MR = MC. Why? Shifts in policy are possible only during periods of profitability. A different production level would involve the same variable costs. Decisions are based on profit or loss in the long run, not the short run. The same policy that maximizes profits will minimize losses. Which statements are true in the long run for a company operating with negative economic profit and positive accounting profit? Match each concept to a corresponding example. total revenue minus fixed and variable costs associated with plant operations cost of fuel to run a factory workspace heating system during the winter total revenue minus all costs, including opportunity costs lost income due to investing in machinery retooling rather than materials to produce more units The long-run supply curve for a single firm, SLR, is vertical below the dashed line and coincides with the MC curve above the dashed line. What does this mean? When the price is above the dashed line, the firm should exit the industry. When the price is above the dashed line, the firm is able to cover both fixed and variable costs. Below the dashed line, the firm is able to cover all variable costs but not all fixed costs. When the price is below the dashed line, the firm still produces at a quantity where price equals marginal cost. Firms will supply goods when the price is above minimum average total cost. A firm will shut down production if price is below average total cost. Consider a firm in the short run which chooses to remain open while it is losing money. To reflect this situation, order the following values from lowest to highest: Which information would be enough to determine a firm’s profit, given that Q = 10,000 units? Please select the segment that functions as the individual firm’s short-run supply curve. Calculate the economic profit of the tree-trimming firm whose explicit and implicit expenses are shown. Ms. Tree has a total revenue of $98,000. During a short-run period where market supply is adjusting to decreased market demand, individual firms that choose to remain in the market will operate at a loss because price, and therefore marginal revenue, is less than average total cost. |
At a market price of $10, the profit-maximizing output for mr. plow is 9 driveways.
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