HELP!!!! Consider the following costs of owning and operating a car. A $25,000 F

Question

HELP!!!!

Consider the following costs of owning and operating a car. A $25,000 Ford Taurus financed over

60 months at 7 percent interest means a monthly payment of $495.03. Insurance costs $100 a month

regardless of how much you drive. The car gets 20 miles per gallon and uses regular-grade gasoline that

costs $3.50 per gallon. Finally, suppose that wear and tear on the car costs about 15 cents a mile. Which

costs are fixed, and which are variable? What is the marginal cost of a mile driven? In deciding whether to

drive from New York to Pittsburgh (about 1,000 miles round-trip) to visit a friend, which costs would you

consider? Why?

PQ5. The model of perfect competition is based on two necessary conditions and a third condition that is

often present as well. Identify each of these conditions and then briefly discuss their importance in the

model.

Explanation / Answer

1) Ans:- Fixed costs: $495.03, $100,

- Variable costs: $3.50 per gallon, $0.18 per mile

- $0.18+$0.15= $0.33

- gas for one mile + depreciation -

You should consider gas and wear and tear. You don’t need to worry about insurance or car payment because you would have to pay those anyway.

2) Two Necessary Conditions for Perfect Competition which are given belo;

First, for an industry to be perfectly competitive, it must contain many producers,none of whom have a large market share. A producer’s market share is the fraction of the total industry output represented by that producer’s output.

Second, an industry can be perfectly competitive only if consumers regard the products of all producers as equivalent.

All perfectly competitive industries have many producers with small market shares,producing a standardized product. Most perfectly competitive industries are also characterized by one more feature: it is easy for new firms to enter the industry or for firms that are currently in the industry to leave which is free entry & exit.

To sum up, then, perfect competition depends on two necessary conditions. First,the industry must contain many producers, each having a small market share.

Second, the industry must produce a standardized product. In addition, perfectly competitive industries are normally characterized by free entry and exit.

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