Micro HW 5 - Microeconomics (Spring 2017) Problem Set 5:...

Microeconomics (Spring 2017)
Problem Set 5: Perfect Competition and Policy Analysis
Submit in Recitation or Lecture, March 27/28, whichever comes first
• Write your answers on separate sheets of paper. Please include:
– your name
– your recitation teacher’s name
– day and time of your recitation
Part I: Short Answer
1. Draw a graph showing the average total cost, average variable cost, and marginal cost curves for a typical
firm. On your graph, draw in three prices: label as P
3
a price that results in the firm making positive profits;
label as P
2
a price that results in the firm breaking even; and label as P
1
a price that results in the firm
making negative profits that are less than fixed costs.
Part II: Competitive Supply
1. Suppose that each perfectly competitive firm in an industry has the short-run cost function C = 10 + 2 q + q
2
,
and the market price is $12. What is the profit-maximizing output level for each firm? What is the total
revenue? What are the profits?
1

MR = 12
At the profit maximizing point, MR = MC :
2 + 2 q = 12
q
⇤
= 5
TR = p ⇤ q = 5