Tutorial 8 - uhhhh. yeah ok PDF

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uhhhh. yeah ok...

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Prices and Markets Tutorial 8: The firm: Perfect and Monopolistic Competition

Q1: A firm operating in a perfectly competitive industry faces the cost curves shown in Figure 1. P0 is the current market price. (a) What is the profit-maximising level of output? (b) What is the profit made by the firm at this level of price and output? (c) If you were told that this industry was in equilibrium, would you judge it as a short-run or a long-run equilibrium? Why?

Figure 1

Q2: Jane, an aspiring entrepreneur, is looking at starting up a home business growing organic turnips, turning it into Turnip Chips, and selling it at the local market. The market for Turnip Chips is served by many small suppliers, but Jane believes the current suppliers may be earning excess profits. She calculates the cost structure of her business, which she believes to be identical to all the other Turnip Chip suppliers operating in her area. You are one of Jane’s smart economist friend and she has asked you to help give her some recommendation with regards to her production. Jane has some ideas about her costs from previous experience which has provided to you.

Quantity

0 1 2 3 4 5 6

Fixed cost ($)

Average variable cost ($)

Average total cost ($)

Margina l cost ($)

10

2.66

6

4.4 7

Suppose the current price of Turnip Chips is $8. With the information available: (a) Should Jane enter into the Turnip Chip industry? Why or why not? (b) What will be the long-run competitive equilibrium price for Turnip Chips? (c) Could Jane earn a profit at this long-run price?

2 2 4 6 8 10

Q3: What is meant by the term ‘excess capacity’ as it relates to monopolistically competitive firms? Use a graph to demonstrate why a profit-maximising monopolistically competitive firm must operate at excess capacity. Explain why a perfectly competitive firm is not subject to the same constraint....