Figure 7-15Answer 1.a.A perfect competition firm is a price taker, so that the firm has a horizontal demand curve. MR is the same as demand curve. In this diagram, MR is horizontal. This shows that this diagram is for perfect competition. b.Market price is given by intersection of MR and MC. This happens at point d, which gives the equilibrium quantity. The equilibrium price is found correspondingly on the demand curve corresponding to the equilibrium point. c.The profit-maximising output is determined by 2 conditionsMR=MC,MC is rising at the point where MR=MC. As shown MR= MC in the diagram at Q= 200d.Total revenue at any point is the product of price and quantity. Revenue at d = price *quantity = 200*40 =8000e.At the profit-maximising output of 200 the total cost = ATC*Q = 24*200 = $4800f.At the profit-maximising output, profits = revenues – costs. These costs are the total costs which include variable and fixed costs both. At pint d, revenues = 8000Costs = 4800So profits at d = 8000-4800 = 3200.1
g.We can find TFC is many ways. One way is TFC = AFC*Q at point d (equilibrium point). But we don’t know AFC here as it is not marked.The second method is to find TFC using any quantity. Consider Q= 150 where ATC = 20 and AVC = 14so that the difference = 20-14 = 6TFC= 6*150 = 900h.TVC= TC – TFC = AC*Q –TFC = 24*200 -900 = 3900i.Identify the firm's short-run supply curve. The short-run supply curve is given by the MC curve that lies above the minimum point of AVC. This is shown as bcd. j.No because the firm is making abnormal profits as AC < P. In long run only normal profits are allowed. Answer 31.The rule that determines price and quantity in any market structure is same. The rule says we must i.equate MR with MC, ii.MC must be rising at this point of equilibrium.The equality between MR and MC is a direct consequence of the profit maximising motive offirms. As shown below equilibrium in perfect competition is achieved at Epc, where equilibrium quantity is Qpc and equilibrium price is Ppc. In contrast the monopoly equilibrium is found at Em where MC=MR. The equilibrium quantity is Qm, and the corresponding price is found on the demand curve at Pm.Qpc > QmPpc < Pm Despite the same rule the price in perfect competition is lower and quantity is higher as shown in the diagram below. This is due to the difference in marginal revenue curves for perfect competition and monopoly. Ina monopoly the MR is downward sloping, as the demand curve is also similar. The firm enjoys some monopoly over the consumer and faces anegatively sloping demand curve. In perfect competition the firm is a price taker and can sell any quantity at given price Ppc. This makes the MR curve horizontal for the firm. 2
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The Assignment on Deman and Supply in Economicslg...