Scenario: Competition. Consider the following cost curves: TC 600.5* q were q is

Question

Scenario: Competition. Consider the following cost curves: TC 600.5* q were q is the individual output for each firm in a perfectly competitive industry. Let the MC = q. Assume the market demand is Q 100 2*P where Q is the market output in 100s of units and P, the market price, is $10 31. Refer to the Scenario: Competition. Each firm in this market will produce how many units? a. 10 c. 20 b. 25 d. 30 32. Refer to the Scenario: Competition. Each firm in this market will earn a profit of...? a. $10 c. -$20 b. -$25 d -$10 33. Refer to the Scenario: Competition. In the short run this firm will a. Shutdown due to economic losses c. Expand output because price is expected to rise b. Continue to produce 10 units despite losses d. Cut back on output to reduce losses Scenario: Monopoly: Consider the following equations for a monopolistic firm where Q is output and P s price P42-1.5*a Demand Marginal cost: MC 2+Q Total Cost TC = 2+2*Q + 0.5 *Q2 34. Refer to Scenario: Monopoly. The monopolist will charge what price and earn what profit? a. P $25 & Profit-$150 c. P-$12 & Profit-$148 b. P= $12 & Profit = $172 d. P- $27 & Profit $198 35. Refer to Scenario: Monopoly. Assume government regulators at the Federal Trade Commission break up the monopolist and the market becomes perfectly competitive. The price and quantity produced in the competitive market will be? a. P-$24, Q-10 C. P= $18, Q-16 b. P $18, Q-24 d. P $20, Q-16

Explanation / Answer

31. Under Perfect Competition; P = MC

10 = q

It implies each firm produces 10 units.

Answer is a) 10

32. Profit = TR - TC = PxQ - 60 - 0.5q2 = 10 x 10 - 60 - 0.5(102) = 40 - 50 = - $ 10

Answer is d) - 10

33. b) Continue to produce 10 units despite losses.

This is because firm is able to cover all its variable cost i.e. 0.5q2 = 0.5(102) = 50 but not able to cover fixed cost of only 10 and if firm shut downs then it will incur more loss i.e. loss of $ 60.

34. Under monopoly, equilibrium condition is MR = MC

TR = P.Q = 42Q - 1.5Q2

MR = 42 - 3Q

MC = 2 + Q

So, MR = MC

42 - 3Q = 2 + Q

40 = 4Q

Q = 10 units

P = 42 - 1.5 x 10 = 42 - 15 = 27

Profit = 27 x 10 - 2 - 2(10) - 0.5(10)2 = 270 - 2 - 20 - 50 = 270 - 72 = 198

Answer is d) Price = $ 27 and Profit = $ 198

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