Question

47.

A perfectly competitive industry has 20 high-cost producers, each with a short-run supply curve given by Q_H = 10 P, and 20 low-cost producers, each with a short-run supply curve given by Q_L = 20 P. The industry demand curve is given by Q^d = 100,000 – 400 P.

At the market equilibrium price, each high-cost producer supplies ____ units and each low-cost producer supplies ____ units

	A.	500; 2,500
	B.	1,000; 2,500
	C.	1,000; 2,000
	D.	2,000; 1,000

46.

A firm's short-run total cost is given by TC = Q ³ - 6 Q ² +10 Q +8. What is the firm's shutdown price?
(Hint: first find the quantity, then find the price)

	A.	$5
	B.	$1
	C.	$4
	D.	$2

43. If a firm's Marginal Revenue (MR) exceeds it's Marginal Cost (MC) at the quantity being produced, the firm should _____ output because ______ .

	A.	expand; revenues will rise by more than costs, increasing the firm's profit
	B.	reduce; total revenues exceed total costs
	C.	not change; selling more output will increase marginal revenue by less than marginal cost
	D.	reduce; revenues will rise by more than costs, increasing the firm's profit

42.

Which of the following characteristics relate(s) to perfect competition?

I.	An industry is dominated by a single powerful firm.
II.	Consumers cannot distinguish one firm's product from another.
III.	New firms can easily enter the industry.

	A.	II and III
	B.	I and II
	C.	II
	D.	III

Answer 1

(47)  20 high-cost producers, each with a short-run supply curve given by Q_H = 10 P

Market supply of high cost producer: Q*_H= 20 Q_H

=> Q*_H = 20 (10P)

=> Q*_H = 200P

20 low-cost producers, each with a short-run supply curve given by Q_L = 20 P

Market supply of low cost producer: Q*_L = 20 Q_L

=> Q*_L = 20 (20P)

=> Q*_L = 400P

Market supply curve: Qs = Q*_H + Q*_L

=> Qs = 200P + 400P

=> Qs = 600P

Market demand curve: Qd = 100,000 - 400P

At market equilibrium; Qs = Qd

=> 600P = 100,000 - 400P

=> 600P + 400P = 100,000

=> 1000P = 100,000

=> P = (100,000 / 1000)
=> P = 100

Market equilibrium price is 100.

QH = 10P (Each high cost firm supply curve)

=> QH = 10 (100)

=> QH = 1000

and,

QL = 20P (Each low cost firm supply curve)

=> QL = 20 (100)

=> QL = 2000

Thus, each high cost producer supplies 1000 units and each low cost producer supplies 2000 units.

Answer: Option (C)

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(46) TC = Q³ - 6Q² + 10Q + 8

TVC = Q³ - 6Q² + 10Q

Note: TVC is that part of TC which depends on Q

AVC = TVC / Q

=> AVC = Q² - 6Q + 10

MC = dTC/dQ

=> MC = 3Q² -12Q + 10

Minimum value of AVC is the shut down price.

AVC is minimum at MC = AVC

=> MC = AVC

=> 3Q² -12Q + 10 = Q² - 6Q + 10

=>  3Q² -12Q + 10 - Q² + 6Q - 10 =0

=> 2Q² - 6Q = =0

=> 2Q² = 6Q

=> Q² / Q = 6 /2

=> Q = 3

At Q=3, AVC is minimum.

Now put Q = 3 and find minimum value of AVC.

=> AVC = Q² - 6Q + 10

=> AVC = (3)² - 6(3) + 10

=>AVC = 9 - 18 + 10

=> AVC = 1

Thus, the minimum value of AVC is $1. So, the shut down price will be $1

Answer: Option (B)

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(43)

If a firm's Marginal Revenue (MR) exceeds it's Marginal Cost (MC) at the quantity being produced, the firm should expands output because revenues will rise by more than costs, increasing the firm's profit

Answer: Option (A)

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(42) There are large number of identitical firms in the perfectly competitive market

All firms produces homogenous products. Hence, consumer can't distinguish one firm's product from other.

There is free entry and exit of firms in the perfect competition market.

Answer: Option (A) i.e. II and III.