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E1006 ProblemSet5

The document contains questions about perfect competition versus imperfect competition, why firms are price takers, the law of diminishing marginal productivity and its implications for marginal and average costs. It also contains questions about profit maximization where price equals marginal cost, the shape of cost curves, and the effects of input price changes and technology improvements on costs.

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74 views4 pages

E1006 ProblemSet5

The document contains questions about perfect competition versus imperfect competition, why firms are price takers, the law of diminishing marginal productivity and its implications for marginal and average costs. It also contains questions about profit maximization where price equals marginal cost, the shape of cost curves, and the effects of input price changes and technology improvements on costs.

Uploaded by

andimahony
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOC, PDF, TXT or read online on Scribd
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PROBLEM SET # 5 ECON 1006EL-01

Chapter 5: The Supply Side of the Market


1. Describe the distinguishing characteristics of a perfectly competitive market vis--vis imperfectly competitive markets. 2. 3. Explain why a firm in a competitive market must behave like a pricetaker. Show that for price-taking firm P = MR = AR. Describe the law of diminishing marginal productivity of the variable factor (Labour) in the short run and its implication for the marginal cost curve of the firm. In the short-run, with the stock of capital held constant, the marginal and the average productivity schedules of labour exhibit a technologically fixed relationship. Describe this relationship in words. Graphically illustrate this relationship. PL and then MPL explain why the competitive firms short run MC curve has a U shape. Define marginal cost (MC) of output. Show that MC = PL and APL then explain why the competitive firms short run AVC curve has a U shape. Define average variable cost (AVC) of output. Show that AVC = Explain why a competitive firms short-run profits will be at the maximum when the firm extends output to the point where P = MC. Carefully define a competitive firms short-run supply curve. Explain why the competitive firms short-run supply curve slopes upward. Why does the competitive firms short-run shut-down point occur at the price P = AVCMin ? Explain your answer.

4.

5.

6.

7. 8. 9.

Use the figure showing the family of short-run cost curves of a competitive firm to answer questions 10-14. Costs

MC

ATC
5.55 4.60 4.00 3.50 3.00 2.80

AVC P3 P2 P1 P0

c b a
d

40 50

65

80

Q Quantity

10

Suppose the market price is p = 5.55. At this price what is the firms short run profitmaximizing Output or supply = Total revenue = Total Cost = Total Variable Cost = Total Fixed Cost = Total Profits =

11.

If the market price persist at price p = 5.55, explain how this competitive industry will adjust to the long run equilibrium state. Describe the key feature of this long run equilibrium state.

12. Suppose the market price is p = 3.00. At this price what is the firms short run profitmaximizing Output or supply = Total revenue =

Total Cost = Total Variable Cost = Total Fixed Cost = Total Profits = 13. 14. 15. Suppose the market price persist at a level slightly higher than P = 3.00, how will resource allocation change in this industry in the long run? Explain your answer. Explain why the price level P = 3.00 is called the short-run shut down price level for the competitive firm. Explain how will each of the following affect the competitive firms MC and AC curves: a. An increase in the price of labour. b. An improvement in technology c. An increase in the price of capital

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