Question

1. Explain the difference between the market demand curve and the demand curve facing a perfectly competitive firm. Which is more elastic?
2. Because of an increase in the wage rate that it must pay its workers, a perfectly competitive firm’s marginal costs increase so that its marginal cost curve shifts upward. If the price of the product does not change and the firm does not shut down, in a diagram show the impact the higher wage rate has on the quantity the firm produces.
3. Draw a diagram showing the long-run equilibrium for a perfectly competitive firm. Is it possible for a perfectly competitive firm to earn an economic profit in the long run? Explain your answer.

Answer the following multiple choice questions.

5. If firms in a perfectly competitive industry are incurring persistent economic losses, then in the long run some firms will
   1. exit and the price will fall.
   2. exit and the price will rise.
   3. enter and the price may either rise or fall.
   4. exit and the price may either rise or fall.
   6. A perfectly competitive firm’s supply curve is the same as
      1. all of its marginal cost curve.
      2. its marginal cost curve above the minimum point on the AVC curve.
      3. its marginal cost curve above the minimum point on the ATC curve.
      4. its marginal cost curve above the AFC curve.

Quantity (units)	Price (dollars per unit)	Total revenue (dollars)
9	10	90
10	10	100
11	10	110

7. Based on the table above, what is the marginal revenue of the tenth unit of output?
   1. $190
   2. $100
   3. $10
   4. $9

8. A perfectly competitive firm shuts down if its
   1. total revenue is less than its average fixed cost.
   2. total revenue is less than its fixed cost.
   3. price is less than its average variable cost.
   4. price is less than its total variable cost.

Answer 1

1)

A market consists of large number of buyers and sellers. The demand curve represents the aggregate demand of the industry. The market demand curve is a downward sloping curve. According to the law of Demand, more quantity is being demanded at low prices and less quantity is being demanded at high prices. Hence, the market demand curve is downward sloping indicating that buyers are willing to buy more quantity at low prices and less quantity at high prices.

A market consists of many buyers and sellers. A perfectly competitive firm is a price- taker . The firm sells it's output at the market determined price. It means that any variation in the output by the firm will have negligible effect on the market supply and the market price of the commodity. As such, the firm is a price taker which sells all its units of output( feasible range of output) at the same market determined price. As all the units of output are sold at the same price, the demand curve that a perfectly competitive firm faces is a perfectly elastic demand curve . Perfectly elastic demand curve indicates that the firm can sell it's feasible range of output at the market determined price and any change in it's output will leave the market supply and price of the commodity unaffected. Also, a perfectly elastic demand curve indicates that the firm need not reduce the price of the product to sell additional units of output. Demand curve for a perfectly competitive firm is a horizontal line parallel to X axis.

Demand curve for a perfectly competitive firm is more elastic than the market demand curve. As demand curve for a perfectly competitive firm is perfectly elastic, any change in the price of the product by the firm will render the quantity demanded by buyers to change by infinity. Hence, the firm cannot sell anything if it charges more than the market price.