Question

Questions #46 - #50  refer to the problem below:

A perfectly competitive industry is made up of identical, profit maximizing firms, each with a total cost (TC) function given by the following:

TC =  10  +  10q  +  q2

Where  TC  is measured in dollars ( $ ) and  q  is measured in units of output.

Its marginal cost function ( MC ) is thus given by the following:

MC  =  10  +  2q

The market (industry) demand curve for this product is given by:

QD  =  200 – P

This industry is currently in equilibrium at a market price of  $20/unit.

At the market equilibrium, each firm is producing ___________ of output, and there are currently __________ in the industry.

Group of answer choices

10 units ; 10 firms

10 units ; 20 firms

5 units ; 36 firms

5 units ; 32 firms

This industry is not in long run equilibrium, because each firm is earning  _________ economic profit, resulting in __________ pressure.

Group of answer choices

Negative ; entry

Positive ; entry

Positive ; exit

Negative ; exit

Each firm is currently producing a level of output at which ATC = ________ ,  AVC = ________,  and MC = _________ .

Group of answer choices

$17 / unit ; $10 / unit ; $20 / unit

$20 / unit ; $15 / unit ; $10 / unit

$17 / unit ; $15 / unit ; $20 / unit

$17 / unit ; $2 / unit ; $20 / unit

Each firm is currently producing a level of output at which ___________ exist and for which the marginal product of labor is __________.

Group of answer choices

Economies of scale ; increasing

Economies of scale ; diminishing

Diseconomies of scale ; increasing

Diseconomies of scale ; diminishing

Assuming the number of firms does not affect any individual firm’s cost structure, which of the following will happen as this industry transitions to long run equilibrium?

I. The market equilibrium quantity will rise

II. Individual firm output will fall

III. Each firm’s ATC level will fall

IV. The market price will rise

Group of answer choices

I and II only

I, II, and III only

II and IV only

II and III only

Answer 1

1. Equilibrium in perfect competition is defined by Price (P)= Marginal Cost (MC).

Equating 20=  10  +  2q, we get q produced by each firm =5.

Now total demand  QD  =  200 – P =200-20 = 180.

Number of firms in industry= total demand/ q produced by each firm= 180/5= 36 firms.

At the market equilibrium, each firm is producing 5 units of output, and there are currently 36 in the industry.

The correct answer is: (c) 5 units ; 36 firms.

2. Total Cost at q=5 is TC =  10  +  10(5) + (5)2 = 85

Total Revenue= price x quantity= 20 x 5= 100

Profit= TR- TC= 100- 85= $ 15

This industry is not in long run equilibrium, because each firm is earning positive economic profit, resulting in entry pressure. A positive profit level acts as an incentive for new firms to enter the industry.

The correct answer is (b) Positive ; entry

3. In Total Cost, 10 represents the fixed cost and 10q  +  q2 represents the total cost.

ATC is average cost per unit output. ATC= TC/q = 85/5= $17

AVC is average variable cost per unit output. AVC= TVC/q = (10q  +  q2)/q = 10 +q = 10+5 = $15

MC at q=5 = 10 + 2 (5)= $20

Each firm is currently producing a level of output at which ATC = 17,  AVC = 15,  and MC = 20.

The correct answer is: (c)$17 / unit ; $15 / unit ; $20 / unit.

4. Each firm is currently producing a level of output at which Economies of scale exist and for which the marginal product of labor is increasing. Since the firm is earning positive profits, it is operating in the short run. But in the long run it can experience economies of scale, that is, lower average costs as output expands. Lower costs means that that marginal productivities of inputs is increasing.

The correct answer is:(a) Economies of scale ; increasing.

5. Assuming the number of firms does not affect any individual firm’s cost structure, which of the following will happen as this industry transitions to long run equilibrium?

The correct answer is: (c) II and III only.

II. Individual firm output will fall- is correct since due to positive profits new firms will enter the market while the total demand will remain the same. Market share per firm will fall as it is equal to= total demand/ number of firms.

III.  Each firm’s ATC level will fall- is correct as economies of scale will result in lower average costs.