Part-3 Chapter-10 

Aplia Homework: The Firm and the Industry under Perfect Competition

1. Characteristics of competitive markets

The model of perfectly competitive markets relies on these four core assumptions:

The first two conditions imply that all consumers and firms are price takers. While the third is not necessary for price-taking behaviour, assume for this problem that a market cannot maintain competition in the long run without free entry.

Identify whether or not each of the following scenarios describes a perfectly competitive market, along with the correct explanation of why or why not.

2. The demand curve facing a competitive firm

Vesoro is one of more than a hundred competitive firms in New York City that produce large cardboard boxes for moving. The following graph shows the daily market demand and supply curves.

On the following graph, use the green line (triangle symbol) to plot the demand curve for Vesoro's large cardboard boxes.

Fill in the price and the total, marginal, and average revenue Vesoro earns when it produces 0, 1, 2, or 3 boxes each day.

The demand curve that Vesoro faces is identical to which of its other curves? Check all that apply.

            Marginal cost curve

            Supply curve

            Average revenue curve

            Marginal revenue curve

3. Profit maximization using total cost and total revenue curves

Suppose Jake runs a small business that manufactures teddy bears. Assume that the market for teddy bears is a perfectly competitive market, and the market price is $20 per teddy bear.

The following graph shows Jake's total cost curve.

Use the blue points (circle symbol) to plot total revenue and the green points (triangle symbol) to plot profit for the first seven teddy bears that Jake produces, including zero teddy bears.

Calculate Jake's marginal revenue and marginal cost for the first seven teddy bears he produces and plot them on the following graph. Use the blue points (circle symbol) to plot marginal revenue and the orange points (square symbol) to plot marginal cost.

Note: Be sure to plot marginal values on the appropriate whole unit values; for example if the marginal revenue of the second teddy bear is y, plot a point at (2, y). Line segments will connect automatically.

Jake's profit is maximized when he produces _______ teddy bears. When he does this, the marginal cost of the last teddy bear he produces is _______, which is _______ than the price Jake receives for each teddy bear he sells. The marginal cost of producing an additional teddy bear (that is, one more teddy bear than would maximize his profit) is ______, which is_______ than the price Jake receives for each teddy bear he sells. Therefore, Jake's profit-maximizing quantity corresponds to the intersection of the _______ curves. Because Jake is a price taker, this last condition can also be written as _______.

4. Profit maximization in the cost-curve diagram

Suppose that the market for polo shirts is a perfectly competitive market. The following graph shows the daily cost curves of a firm operating in this market.

In the short run, at a market price of $15 per shirt, this firm will choose to produce _______ shirts per day.

On the previous graph, use the blue rectangle (circle symbols) to shade the area representing the firm's profit or loss if the market price is $15 and the firm chooses to produce the quantity you already selected.

The area of this rectangle indicates that the firm’s ________ would be$ _______ per day. (Hint: Be sure to take note of the units used on the vertical and horizontal axes.)

5. Deriving the short-run supply curve

Consider the perfectly competitive market for dress shirts. The following graph shows the marginal cost (MC), average cost (AC), and average variable cost (AVC) curves for a typical firm in the industry.

For each price in the following table, use the graph to determine the number of shirts this firm would produce in order to maximize its profit. Assume that when the price is exactly equal to the average variable cost, the firm is indifferent between producing zero shirts and the profit-maximizing quantity. Also, indicate whether the firm will produce, shut down, or be indifferent between the two in the short run. Lastly, determine whether it will make a profit, suffer a loss, or break even at each price.

On the following graph, use the orange points (square symbol) to plot points along the portion of the firm's short-run supply curve that corresponds to prices where there is positive output.

Note: You are given more points to plot than you need. Plot your points in the order in which you would like them connected. Line segments will connect the points automatically.

Suppose there are 5 firms in this industry, each of which has the cost curves previously shown.

On the following graph, use the orange points (square symbol) to plot points along the portion of the industry’s short-run supply curve that corresponds to prices where there is positive output. (Note: You are given more points to plot than you need. Do not plot the extra points) Then, place the black point (plus symbol) on the graph to indicate the short-run equilibrium price and quantity in this market.

Note: Dashed drop lines will automatically extend to both axes.

At the current short-run market price, firms will _______ in the short run. In the long run, _________.

6. Short-run equilibrium

Consider a perfectly competitive market for wheat in Philadelphia. There are 90 firms in the industry, each of which has the cost curves shown on the following graph:

Hint: Use the black point (plus symbol) to view the coordinates of the points on the AVC, AC, and MC curves. You will not be graded for any changes made to this graph.

The following graph shows the market demand for wheat.

Use the orange points (square symbol) to plot the short-run industry supply curve for the wheat industry. Specifically, place an orange point at the lowest point of the supply curve and another orange point at the highest point of the supply curve. (Note: You can disregard the portion of the supply curve that corresponds to prices where there is no output, since this is the industry supply curve. Plot your points in the order in which you would like them connected. Line segments will connect the points automatically.) Then, place the black point (plus symbol) on the graph to indicate the short-run equilibrium price and quantity in this market.

Note: Dashed drop lines will automatically extend to both axes.

At the current short-run market price, firms will _______ in the short run. In the long run, _______ the market given the current market price.

7. Short-run supply and long-run equilibrium

Consider the perfectly competitive market for copper. Assume that, regardless of how many firms are in the industry, every firm in the industry is identical and faces the marginal cost (MC), average cost (AC), and average variable cost (AVC) curves shown on the following graph.

The following diagram shows the market demand for copper.

Use the orange points (square symbol) to plot the initial short-run industry supply curve when there are 10 firms in the market. (Hint: You can disregard the portion of the supply curve that corresponds to prices where there is no output, since this is the industry supply curve.) Next, use the purple points (diamond symbol) to plot the short-run industry supply curve when there are 15 firms. Finally, use the green points (triangle symbol) to plot the short-run industry supply curve when there are 20 firms.

If there were 10 firms in this market, the short-run equilibrium price of copper would be ____ per pound. At that price, firms in this industry would ______. Therefore, in the long run, firms would ____ the copper market.

Because you know that the perfectly competitive firms earn ____ economic profit in the long run, you know the long-run equilibrium price must be ____ per pound. From the graph, you can see that this means there will be ___ firms operating in the copper industry in long-run equilibrium.

True or False: Each of the firms operating in this industry in the long run earns negative accounting profit.

            True

            False

8. The invisible hand

Suppose you own two factories that produce widgets. Factory 2 is suitably located near a firm that sells raw materials needed to make widgets, whereas Factory 1 is in a more remote location and thus has higher transportation costs. Assume zero fixed costs for both factories. The following graph illustrates the marginal cost (MC) for producing widgets in each of these factories.

You need to produce 18,000 widgets, and you have three options to allocate your production.

Calculate the total cost (TC) of production under each of the options, and enter them in the following table.

Hint: The area under the MC curve gives you the total cost. To determine total costs, you can either calculate the area yourself or use the green points (triangle symbols) or the purple points (diamond symbols) on the graph to shade the area representing total costs for each. After you place a triangle in the appropriate region on the graph, you can select the triangle to get its area. You will not be graded on where you place the triangles.

Which option minimizes the total cost of production?

            Option I

            Option II

            Option III