BE AWARE! The numbers in this exam won’t correspond to common ideas of “perfect competition” – I’ve done this deliberately, so simplify the numbers and make your life easier. Trust me: it’s a perfectly-competitive market. Suppose, in the market for pencils, market demand is defined by Q D = 50 – 5P. (1) Sketch the demand curve. ( 5 marks ) (2) If the market supply curve is defined by Q S = 5P, what will the market equilibrium price (P*) and quantity (Q*) be? ( 5 marks ) (3) Suppose that, under an open economy, the World Price will be P W = $3. How many pencils will be imported? Specifically, what is domestic supply with trade (you’ll need this later on). ( 10 marks ) (4) Suppose that firms had been making a profit at P*, but now make zero Economic Profit at P W = $3. Sketch the effect on the cost structure for a given pencil manufacturer. Sketch – hypothetical – MC and ATC curves such that the MR curves correspond to your answers above. Label everything! ( 10 marks ) (5)
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