Question

Chapter 10 Pure Competition in the Short Run Assignment

1.   Identify and discuss the main characteristics of pure competition.

2.   Assume a single firm in a purely competitive industry has variable costs as indicated in the following

table in column 2. (refer back to the computations from chapter 9) Complete the table and answer the questions.

(1) Total product	(2) Total Variable cost	(3) Total Fixed cost	(4) Total cost	(5) Average Fixed cost	(6) Average Variable cost	(7) Average Total cost	(8) Marginal cost
0	$    0	$40	$   40	XXXXX	XXXXX	XXXXX	XXXXXX
1	55	40	95	40	55	95	20
2	75	40	115	20	37.5	57.5	15
3	90	40	130	13.38	30	43.33	20
4	110	40	150	10	27.5	37.5	25
5	135	40	175	8	27	35	35
6	170	40	210	6.66	28.33	35	50
7	220	40	260	5.71	31.42	37.14	70
8	290	40	330	5	36.25	41.25

(a) At a product price of $52, will this firm produce in the short run? Explain. What will its profit or loss be?

(b) At a product price of $28, will this firm produce in the short run? Explain. What will its profit or loss be?

(c)   At a product price of $22, will this firm produce in the short run? Explain. What will its profit or loss be?

(d) Complete the following short-run supply schedule for this firm. Base your results on the information from above.

Product price	Quantity supplied	Profit (+) or loss (−)
$72		$
52
45
28
22
15

Answer 1

1) A pure competition market has the following characteristics:-

- A large number of buyers and sellers- A large number of buyers and sellers exists in the market so that output produced by a single firm represent a very small share of the market output.

- Homogenous or identical goods- all the firms in the perfectly competitive market produces an identical good with no differentiation so that goods of all the firms are the same.

- Perfect knowledge- buyers and sellers have perfect knowledge about the market and the goods produced.

- Firms are Price takers - the firms are price takers and must accept the given market price as the price of their goods

- Free entry and Exit - it ensures that the firms are free to enter the market when the market is earning positive profits and free to exit the market when the firms are incurring losses which ensures that the firms will only earn zero profits in the long run.

2) a) p=52

Yes,this firm will produce as the price is above its minimum AVC which is its shutdown point.

Setting P=MC,it will produce Q=6 units

Profit = P-ATC*Q = 50-35*6 = 90

b) p=28

Yes,this firm will produce as the price is above its minimum AVC

Setting P=MC, the firm will produce Q=4 units

loss = 28-37.5*4 = -38

c) No,this firm will not produce as the price is less than minimum AVC

Q=0 units

Loss = -40

d)

.

Product price	Quantity supplied	Profit (+) or loss (−)
$72	7	72-37.14*7 = 244.02
52	6	52-35*6 = 102
45	5	45-35*5 = 50
28	4	28-37.5*4 = -38
22	0	-40
15	0	-40