Module 5 Perfect Competition Problems

# Module 5 Perfect Competition Problems - The firm is selling...

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Unformatted text preview: The firm is selling in a perfectly competitive market. a. Fill in the blank columns. b. What is the minimum price needed by the firm to break even? c. What is the shutdown price? d. At a price of \$40, what output level would the firm produce? Information Needed Output 1 2 3 4 5 Fixed Cost AFC \$50.00 \$50.00 \$50.00 \$50.00 \$50.00 Variable Cost AVC \$30.00 \$50.00 \$80.00 \$120.00 \$170.00 Total Cost ATC Information Used Output 1 2 3 4 5 A. B. C. Fixed Variable Cost AFC Cost AVC \$50.00 \$50.00 \$30.00 \$30.00 \$50.00 \$25.00 \$50.00 \$25.00 \$50.00 \$16.67 \$80.00 \$26.67 \$50.00 \$12.50 \$120.00 \$30.00 \$50.00 \$10.00 \$170.00 \$34.00 Total Cost ATC \$80.00 \$80.00 \$100.00 \$50.00 \$130.00 \$43.33 \$170.00 \$42.50 \$220.00 \$44.00 See information used For a perfectly competitive market, break even output occurs at the point where the price is equal to the point of the average total cost (ATC). The ATC is at its minimum of \$42.50 when the output is 4 units. T needed by the firm to break­even is \$42.50 (at 4 units of output). This can be also seen on the "informat We are taught that the firm shutdown price is the minimum point of the average­variable­cost curve is the shutdown price. As you can see on the "information used" table, where it is highlighted in orange, the firm shutdown pric D. This question is little too subjective, but lets see if I can get the meaning of it. The definition of marginal We also can interpret and say that the ATC for a company to produce their product and its minimum poi With keeping this in mind because the price isn't given to us here, so we cant pinpoint what would occu they usually want to price it at a point where they are breaking even or doing better, so if they made the is \$42.50 at a marginal cost of \$40. This all occurs at output level four, with this painted for us lets see w Given information output level Price Variable cost Fixed cost Profit or loss= Total Revenue Variable cost Fixed cost loss= 4 Units 40 Per unit 30 Per unit 50 In total TR­VC ­FC \$160.00 \$120.00 \$50.00 ­\$10.00 So at an output level of 4, we occur loss. I believe this is because the actual break even point was \$42.5 you will incur loss, for us to make up for it we would need to output more with the same cost in place in t As if you have set amount of resources and if you take out a loan that cost should be included in this eq the output to 5 and keep the cost the same. Total Revenue Variable cost Fixed cost Profit= \$200.00 \$120.00 \$50.00 \$30.00 MC MC \$80.00 \$20.00 \$30.00 \$40.00 \$50.00 *Firm Shutdown Point *Break Even Point nt where the price is equal to the minimum 2.50 when the output is 4 units. Therefore, the minimum price an be also seen on the "information used" table, where it is highlighted in yellow. average­variable­cost in orange, the firm shutdown price is \$25.00. g of it. The definition of marginal cost is the change in cost over the change in output. heir product and its minimum point represents the breakeven point and anything higher than that point is profit e cant pinpoint what would occur exactly but we can assume that when a company prices its product doing better, so if they made the price at \$40 you will incur a little loss, as breakeven point for us here with this painted for us lets see what will happen: ctual break even point was \$42.50 and because the price was set below the breakeven point naturally e with the same cost in place in the real business world this can only happen through a grant or donation. cost should be included in this equation. But for hypnotically speaking lets see what happens if we change a. What is the equilibrium price and quantity? b. Draw the demand and supply curves. If this represents perfect competition, are the curves individual firm or market curves? How is the quantity supplied derived? c. Show the consumer surplus. Show the producer surplus. d. Suppose that a price ceiling of \$12 was imposed. How would this change the consumer and producer surplus? Suppose a price floor of \$16 was imposed. How would this change the consumer and producer surplus? Information Given Price Quantity Supplied Quantity Demanded \$20.00 30 0 \$18.00 25 5 \$16.00 20 10 \$14.00 \$12.00 \$10.00 \$8.00 A. 15 10 5 0 * Equilibrium 15 20 25 30 See information given highlighted in yellow At the price of \$14 we have equilibrium where quantity supplied=quantity demanded B. 35 30 30 30 25 20 Quantity Supplied Quantity Demanded * Equilibrium Equilibrium 15 10 5 0 \$5.00 \$ 10.00 \$ 15.00 \$ 20.00 \$ 25.00 Quantity Supplied Quantity Demanded * Equilibrium 15 10 5 0 \$5.00 \$ 10.00 \$ 15.00 Price \$ 20.00 \$ 25.00 These are market demand curve as in a perfectly competitive market the demand curve faced by a firm is Quantity supplied in a perfectly competitive market is determined by the interaction of demand and supply Thus equilibrium level of quantity supplied is the level where quantity demanded equals to quantity suppl In this case the equilibrium level would be 15 units where the demand is equal to supply C. 35 30 30 30 25 * Consumer & Producer Surplus Provided I intentional created the graph where the price is on the X­axis and the Quantity on the Y­axis to help illustrate that the consumer surplus is the area above the price of the equilibrium while the producer is below the price 20 Quantity Supplied Quantity Demanded * Equilibrium Equilibrium 15 10 Consumer Surplus 5 0 \$5.00 \$10.00 \$15.00 \$20.00 \$25.00 Price D. \$25.00 Consumer Surplus \$20.00 In comparison to the figure in letter "C" which represents \$15.00 the original graph you can see that the quantity decreased \$10.00 a lot on both the consumer \$5.00 \$- Quantity Demanded Quantity Supplied Equilibrium Price Ceiling Price Floor \$15.00 Quantity Demanded Quantity Supplied \$10.00 and producer surplus this \$5.00 of coarse is all in the context of the price being at equilibrium, I imagine that \$0 the company is running low on resources and had to make cut backs. Equilibrium Price Ceiling Price Floor Producer Surplus 5 10 15 20 25 30 35 and curve faced by a firm is a horizontal line i.e. demand does not changes with the change in price. action of demand and supply curve. ded equals to quantity supplied. al to supply Quantity Supplied Quantity Demanded * Equilibrium Equilibrium er Surplus 25.00 Price Quantity Demanded Quantity Supplied Equilibrium Price Ceiling Price Floor Quantity Demanded Quantity Supplied Equilibrium Price Ceiling Price Floor 35 ...
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## This note was uploaded on 08/04/2011 for the course ECN 601 taught by Professor Professor during the Spring '10 term at Grand Canyon.

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