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1 . Market structures

For each scenario in the following table, determine which market model best describes the scenario. Then identify the number of firms, the type of

product, and the ease with which new firms can enter the market under this market structure.

Number of
Scenario Firms Type of Product Entry Market Model

Hundreds of colleges serve millions of students each Many Differentiated Easy Price-searcher

year. The colleges vary by location, size, cost, and

educational quality, which allows students to match

schools to their diverse preferences.

Hundreds of high school students who require tutoring in Many Standardized Easy Price-taker
algebra choose among dozens of tutoring companies
offering similar services.

Three airlines operate between San Francisco and San Few Standardized Challenging Oligopoly
Diego. There are not enough potential customers to
share the route with a fourth airline without causing the

average costs of the existing competitors to rise

substantially. Consumers view all airlines as providing

the same service and will select the least expensive one.

The government has granted the U.S. Postal Service the One Unique Impossible Monopoly
exclusive right to deliver mail.

Points: 1/1

Explanation: Close Explanation

The higher education market is characterized by many colleges selling differentiated products; therefore, the price-searcher model is the most

accurate model to analyze this market.

The tutoring market is an example of a price-taker market: There are many firms selling a standardized product, and entry into the market is

easy. Consequently, firms are price takers in this market.

A few firms dominate the airline travel market; therefore, this market is an oligopoly. Oligopolistic firms have some control over the price they
charge, but they take their competitors’ responses into account when they set their own prices. (Note: In the airline travel market scenario,

customers view the airline travel as a standardized good. However, generally, an oligopoly is characterized by differentiated goods.)

Because the U.S. Postal Service is the only legal provider of mail delivery services, it fits the definition of a monopoly. It sells a unique product

and has considerable control over the price it charges. Additionally, entry of new firms is prohibited.

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2 . Characteristics of competitive markets

The model of competitive markets relies on these three core assumptions:

1. There must be many buyers and sellers—a few players can't dominate the market.

2. Firms must produce an identical product—buyers must regard all sellers' products as equivalent.

3. Firms and resources must be fully mobile, allowing free entry into and exit from the industry.

The first two conditions imply that all consumers and firms are price takers. While the third is not necessary for price-taking behavior, assume for this

problem that a market cannot maintain competition in the long run without free entry.

Identify whether or not each of the following scenarios describes a competitive market, along with the correct explanation of why or why not.

Scenario Competitive?

No, not many sellers

Two taxi companies serve most of the market in a big city. Consumers don't care which

taxi company they take—if they decide it's worth taking a taxi, they flag down the nearest
one.

No, not an identical product

Several stores in the mall sell hooded sweatshirts. Each store's sweatshirts reflect the
style of that particular store. Additionally, some makers use higher-quality cotton than
others, which is reflected in the apparel's prices.

No, no free entry

The government has granted the U.S. Postal Service the exclusive right to deliver mail.

Yes, meets all assumptions

There are dozens of pasta producers that sell pasta to hundreds of Italian restaurants
nationwide. The restaurant owners buy from the cheapest pasta producer available to

them.

Points: 1/1

Explanation: Close Explanation

The pasta market is the only one of these options that is a competitive market. Because the U.S. Postal Service is the only legal provider of mail

delivery services, there isn't free entry into that market. Since there is only one seller and the good is unique, the answers No, not many

sellers and No, not an identical product would also be accepted. Because a few firms dominate the taxi services market, they are not price
takers. Finally, consumers regard the products offered by various apparel stores as different, so the hooded sweatshirt market is not

characterized by an identical product.

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3 . The demand curve facing a competitive firm

The following graph shows the daily market for large cardboard boxes in San Francisco.

40

36 Demand

32 Supply
PRICE (Dollars per large box)

28

24

20

16

12

0
0 1 2 3 4 5 6 7 8 9 10
QUANTITY (Millions of large boxes)

Suppose that Talero is one of more than a hundred competitive firms in San Francisco that produce such cardboard boxes.

Based on the preceding graph showing the daily market demand and supply curves, the price Talero must take as given is $20 .

Points: 1/1

Explanation: Close Explanation

In a competitive market, many firms sell an identical product to many buyers. Therefore, if Talero charges even slightly more for a box than

other firms charge, it will lose all its customers because every other firm in the industry is offering a lower price. In other words, one of Talero's

boxes is a perfect substitute for boxes from the factory next door or from any other factory. On the other hand, if Talero charges less than what
other firms charge, Talero would also be worse off, because the quantity sold would remain the same (since the firm can already sell as much

output as it wants at the market price) but the revenue from each unit sold would be lower. Thus, as a competitive firm, Talero must accept the

price of $20 per large box as given. In other words, it faces a perfectly elastic (horizontal) demand curve for its output at the current market
price (in this case, $20 per large box). The green line on the following graph illustrates the demand curve for Talero's large cardboard boxes:

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40

36

32
PRICE (Dollars per large box)

28

24

20

16

12

0
0 1 2 3 4 5 6 7 8 9 10
QUANTITY (Thousands of large boxes)

It is important to note that while the demand curve of a competitive firm is perfectly elastic, the market demand curve of a competitive market

(as shown on the first graph), still obeys the law of demand and is downward sloping.

Fill in the price and the total, marginal, and average revenue Talero earns when it produces 0, 1, 2, or 3 boxes each day.

Quantity Price Total Revenue Marginal Revenue Average Revenue

(Boxes) (Dollars per box) (Dollars) (Dollars) (Dollars per box)

0 20 0 –
20
1 20 20 20
20
2 20 40 20
20
3 20 60 20

Points: 1/1

Explanation: Close Explanation

Because the market is competitive, Talero is a price taker. Thus, no matter how many boxes it sells, it receives $20 for each one. You can
calculate Talero's total revenue by multiplying price and quantity:

Total Revenue = Price × Quantity

= $20 per box × 1 box
= $20

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Aplia: Student Question 28/11/2021, 11:47 PM

Each large box that Talero sells earns the company $20 in revenue. Therefore, the marginal revenue from each large box sold is $20.

Average revenue is equal to total revenue divided by quantity:

Total Revenue
Average Revenue = Quantity
Price×Quantity
= Quantity
= Price

So, Talero's average revenue is equal to the market price of $20.

The demand curve that Talero faces is identical to which of its other curves? Check all that apply.

Marginal revenue curve

Average revenue curve

Supply curve

Marginal cost curve

Points: 1/1

Explanation: Close Explanation

Since a competitive firm faces a perfectly elastic demand curve at the market price, it can sell any quantity it chooses at this price. This is

shown as a horizontal demand curve at the market price.

Because all units produced are sold at the market price, the change in total revenue that results from a one-unit increase in the quantity sold is

equal to the price. Thus, the marginal revenue curve is a horizontal line at the market price. Therefore, the demand curve and the marginal

revenue curve are the same.

Because all units produced are sold at the market price, the average amount of revenue per unit sold is also equal to the market price.

Therefore, the demand curve and the average revenue curve are the same.

A firm's demand curve has nothing to do with the firm's cost structure because demand is constructed from buyers' preferences about the good

or service being sold, whereas cost depends on things such as input prices and methods of production.

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4 . Short-run supply and long-run equilibrium

Consider the competitive market for titanium. Assume that, regardless of how many firms are in the industry, every firm in the industry is identical

and faces the marginal cost (MC), average total cost (ATC), and average variable cost (AVC) curves shown on the following graph.

100

90

80
COSTS (Dollars per pound)

70

60

50

40

ATC
30

20

AVC
10 MC

0
0 5 10 15 20 25 30 35 40 45 50
QUANTITY (Thousands of pounds)

The following diagram shows the market demand for titanium.

Use the orange points (square symbol) to plot the initial short-run industry supply curve when there are 20 firms in the market. (Hint: You can

disregard the portion of the supply curve that corresponds to prices where there is no output since this is the industry supply curve.) Next, use the

purple points (diamond symbol) to plot the short-run industry supply curve when there are 30 firms. Finally, use the green points (triangle symbol) to

plot the short-run industry supply curve when there are 40 firms.

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Your Answer Correct Answer

100

90

Supply (20 firms)

80

70
PRICE (Dollars per pound)

60 Supply (30 firms)

50

40 Supply (40 firms)

Demand
30

20

10

0
0 125 250 375 500 625 750 875 1000 1125 1250
QUANTITY (Thousands of pounds)

Points: 1/1

Explanation: Close Explanation

In the short run, a competitive firm will produce as long as the market price is equal to or greater than the shutdown price of $15. For prices

below $15, firms in this industry are unable to cover their variable costs and will shut down and, thus, not produce. For prices above $15, the

industry's supply curve corresponds to the horizontal summation of all firms' marginal cost curves. For example, at a price of $15, each firm will

produce 15,000 pounds of titanium. Therefore, 20 firms would supply a total of 15,000 pounds per firm × 20 firms = 300,000 pounds at that

price, 30 firms would supply a total of 15,000 pounds per firm × 30 firms = 450,000 pounds , and 40 firms would supply a total of
15,000 pounds per firm × 40 firms = 600,000 pounds . To construct the rest of each supply curve, you can perform similar calculations at
prices of $30, $40, $70, and $90 per pound.

If there were 20 firms in this market, the short-run equilibrium price of titanium would be $40 per pound. At that price, firms in this industry

would earn a positive profit . Therefore, in the long run, firms would enter the titanium market.

Points: 1/1

Explanation: Close Explanation

The short-run industry supply curve with 20 firms intersects the demand curve at a price of $40 per pound of titanium. This corresponds to a

point on the marginal cost curve that is above each firm's average total cost curve. Therefore, in the short run, firms in this industry are more

than able to cover fixed costs and variable costs; thus, they earn a positive profit.

The fact that firms in this industry are earning positive profit will encourage entry into the market. This entry by new firms will drive the market

price down until firms earn zero profit. At this point, firms not in the industry will have no incentive to enter, and firms in the industry will have

no incentive to exit, so the industry will be in long-run equilibrium.

Because you know that competitive firms earn zero economic profit in the long run, you know the long-run equilibrium price must be
$30 per pound. From the graph, you can see that this means there will be 30 firms operating in the titanium industry in long-run

equilibrium.

Points: 1/1

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Explanation: Close Explanation

In the long run, firms will enter the industry if they can earn a positive profit, and firms will exit the industry if they are running at a loss. In

long-run equilibrium, firms have no incentive to either enter or exit the industry, which means that firms in the industry must be earning zero

profit.

Profit is the difference between total revenue and total cost. Breaking this down even further yields the result that profit equals

(P − ATC) × Q . Because profit per unit is measured by P − ATC , and because competitive firms produce at the point at which price equals
marginal cost (MC ), firms earn zero profit when P = ATC = MC . Looking at the preceding cost-curve graph, you can see that this occurs at a
price of $30 per pound.

Note also that price equals ATC at the point where ATC reaches a minimum. The level of production corresponding to the lowest average total

cost is called the firm's efficient scale; therefore, in the long-run equilibrium of a competitive market with free entry and exit, firms must be

operating at their efficient scale.

From the preceding graph, you can see that the short-run equilibrium price is $30 per pound if there are 30 firms in the titanium industry,
indicating that $30 per pound is the long-run price. Therefore, if there are 30 firms in the industry, firms will have no incentive to enter or exit

the market.

True or False: Assuming implicit costs are positive, each of the firms operating in this industry in the long run earns positive accounting profit.

True

False

Points: 1/1

Explanation: Close Explanation

Accounting profit is defined as total revenue minus the sum of all explicit costs:

Accounting Profit = Total Revenue − Explicit Costs

Economic profit, by contrast, is defined as total revenue minus the sum of explicit costs and implicit costs:

Economic Profit = Total Revenue − (Explicit Costs + Implicit Costs)

= Total Revenue − Explicit Costs − Implicit Costs

Therefore, Economic Profit = Accounting Profit − Implicit Costs . Since economic profit is zero, Accounting Profit − Implicit Costs = 0 .

Therefore, if economic profit is zero in the long run and implicit costs are positive, accounting profit must be positive. Indeed, in the case of zero
economic profit, implicit costs and accounting profit are equal.

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5 . Short-run and long-run effects of a shift in demand

Suppose that the shrimp industry is in long-run equilibrium at a price of $5 per pound of shrimp and a quantity of 150 million pounds per year.

Suppose that WebMD claims that the bacteria found in shrimp will decrease your expected lifespan by 5 years.

WebMD’s claim will cause consumers to demand less shrimp at every price. In the short run, firms will respond by

producing less shrimp and running at a loss .

Points: 1/1

Explanation: Close Explanation

WebMD’s claim causes the quantity of shrimp demanded to decrease at every price, shifting the demand curve inward. In the short run, the
number of firms in the shrimp industry is fixed. Therefore, the shift in demand causes a movement along the short-run supply curve. The price
of shrimp decreases, and each firm produces less shrimp than before.

Because the shrimp industry was originally in long-run equilibrium, firms were earning zero profit before WebMD’s claim. Therefore, a decrease
in price would cause firms to run at a loss.

Shift the demand curve, the supply curve, or both on the following graph to illustrate these short-run effects of WebMD’s claim.

Your Answer Correct Answer

10

9
Supply
Demand
8

7
PRICE (Dollars per pound)

6 Supply

3
D
1
2

1
D
2
0
0 30 60 90 120 150 180 210 240 270 300
QUANTITY (Millions of pounds)

Points: 1/1

In the long run, some firms will respond by exiting the industry until

each firm in the industry is once again earning zero profit .

Points: 1/1

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Explanation: Close Explanation

Since WebMD’s claim caused the price of shrimp to decrease, firms in this industry began running at a loss. In the short run, the number of

firms in the shrimp industry was fixed, but in the long run, firms in the shrimp industry that earn negative profit will exit the market. This
process continues until firms are once again earning zero profit.

Shift the demand curve, the supply curve, or both on the following graph to illustrate both the short-run effects of WebMD’s claim and the new long-

run equilibrium after firms and consumers finish adjusting to the news.

Your Answer Correct Answer

S
2
10

9
S
1 Demand
8

7
PRICE (Dollars per pound)

6 Supply

3
D
1
2

1
D
2
0
0 30 60 90 120 150 180 210 240 270 300
QUANTITY (Millions of pounds)

Points: 1/1

Explanation: Close Explanation

WebMD’s claim caused demand for shrimp to decrease in the short run, and nothing happened in the long run to change that. Therefore, the

demand curve shifted to the left.

WebMD’s claim also caused the price of shrimp to decrease in the short run, which meant firms in this industry were running at a loss. In the
short run, the number of firms in the shrimp industry was fixed, but in the long run, firms in the shrimp industry that earn negative profit will

exit the market. As they do, the supply curve will shift to the left, raising the short-run equilibrium price. This process continues until firms are

once again earning zero profit.

The new equilibrium price and quantity suggest that the shape of the long-run supply curve in this industry is horizontal in the long run.

Points: 1/1

Explanation: Close Explanation

In the long run, firms enter or exit the market until profit is equal to zero or when price is equal to the minimum of average total cost. When all

firms have identical cost structures, the long-run market supply curve is horizontal at this price because no other price can sustain the zero-

profit condition for all firms. This is suggested by the preceding graph, where the equilibrium price in the long run returns to the minimum of
average total cost of $5.

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However, when the cost structure of firms varies, it’s possible for the long-run market supply curve to be upward sloping. In this case, the long-
run condition requires that at least the marginal firm (the last firm to enter or exit the market) earns zero profit. In other words, the market

reaches long-run equilibrium when it would not be profitable for any additional firms to enter or exit this market even if existing firms with lower

costs are making positive profit in the short run.

Another reason the long-run market supply curve might be upward sloping is if some resources used in production (such as land) are available

only in limited quantities. In this case, greater demand for a good may cause the price of that limited input to rise, which, in turn, raises the

industry costs of production of that good, causing the long-run market supply curve to slope upward.

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6 . Profit maximization using total cost and total revenue curves

Suppose Jacques runs a small business that manufactures frying pans. Assume that the market for frying pans is a competitive market, and the

market price is $20 per frying pan.

The following graph shows Jacques's total cost curve.

Use the blue points (circle symbol) to plot total revenue and the green points (triangle symbol) to plot profit for frying pans quantities zero through
seven (inclusive) that Jacques produces.

Your Answer Correct Answer

200

175

Total Revenue
TOTAL COST AND REVENUE (Dollars)

150
Total Cost
125

Profit
100

75

50

25

-25
0 1 2 3 4 5 6 7 8
QUANTITY (Frying pans)

Points: 1/1

Explanation: Close Explanation

Total revenue is equal to price times quantity. Therefore, the total revenue curve is an increasing line with a slope of $20 per unit.

Profit is equal to total revenue minus total cost. The following table captures the data needed to plot the total revenue curve and profit curve:

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Quantity Total Revenue Total Cost Profit

(Frying pans) (Dollars) (Dollars) (Dollars)

0 0 20 -20

1 20 35 -15

2 40 40 0

3 60 45 15

4 80 55 25

5 100 70 30

6 120 95 25

7 140 125 15

Calculate Jacques's marginal revenue and marginal cost for the first seven frying pans he produces, and plot them on the following graph. Use the

blue points (circle symbol) to plot marginal revenue and the orange points (square symbol) to plot marginal cost at each quantity.

Your Answer Correct Answer

40

35
COSTS AND REVENUE (Dollars per frying pan)

Marginal Revenue
30

25
Marginal Cost

20

15

10

0
0 1 2 3 4 5 6 7 8
QUANTITY (Frying pans)

Points: 1/1

Explanation: Close Explanation

Marginal revenue is equal to the additional revenue earned for each additional frying pan sold. For a competitive firm, marginal revenue is

always equal to the market price. Since Jacques can sell as many frying pans as he can make at a price of $20 per frying pan, his marginal

revenue from selling any given frying pan is $20.

Marginal cost is the change in cost when Jacques increases production by one frying pan. You can find this by calculating the difference

between each total cost given in the following table. For instance, the marginal cost of the third frying pan ($5) is equal to the total cost of
producing three frying pans ($45) minus the total cost of producing two frying pans ($40):

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Quantity Total Revenue Marginal Revenue Total Cost Marginal Cost

(Frying pans) (Dollars) (Dollars) (Dollars) (Dollars)

0 0 20
20 15
1 20 35
20 5
2 40 40
20 5
3 60 45
20 10
4 80 55
20 15
5 100 70
20 25
6 120 95
20 30
7 140 125

Jacques's profit is maximized when he produces 5 frying pans. When he does this, the marginal cost of the last frying pan he produces is

$15 , which is less than the price Jacques receives for each frying pan he sells. The marginal cost of producing an additional frying pan

(that is, one more frying pan than would maximize his profit) is $25 , which is greater than the price Jacques receives for each frying pan
he sells. Therefore, Jacques's profit-maximizing quantity corresponds to the intersection of the marginal cost and marginal revenue curves.

Because Jacques is a price taker, this last condition can also be written as Profit = TR − TC .

Points: 0.86 / 1

Explanation: Close Explanation

As shown on the first graph, profit is maximized at an output level of 5 frying pans. At this quantity, the difference between total revenue and

total cost is greatest. Another way of thinking about this is to realize that for the first 5 frying pans that Jacques produces, the marginal cost (

MC ) of producing each frying pan is less than the marginal revenue (MR ) he receives from selling the frying pan. Beyond the fifth frying pan he
produces each hour, the marginal cost of producing that frying pan is greater than the price Jacques receives for it; therefore, choosing to

produce more than 5 frying pans reduces Jacques's profit.

Because MR > MC ($20 > $15 ) to the left of the optimal quantity and MR < MC ($20 < $25 ) to the right of the optimal quantity, the optimal
quantity corresponds to the intersection of the marginal cost and marginal revenue curves. (Note: When the two curves intersect between

discrete values, the optimal quantity occurs at the greatest quantity where marginal cost is below marginal revenue.) Furthermore, since

marginal revenue is always equal to price (P ) for a firm in a competitive market, the optimal quantity for such a firm is the one at which

P = MC .

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7 . Profit maximization in the cost-curve diagram

Suppose that the market for wind chimes is a competitive market. The following graph shows the daily cost curves of a firm operating in this market.

Hint: After placing the rectangle on the graph, you can select an endpoint to see the coordinates of that point.

Correct Answer Your Answer

40

36

Profit or Loss
32
PRICE (Dollars per wind chime)

28

24

20

ATC
16

12

AVC
8 MC

0
0 2 4 6 8 10 12 14 16 18 20
QUANTITY (Thousands of wind chimes per day)

Points: 0/1

In the short run, at a market price of $20 per wind chime, this firm will choose to produce 9,000 wind chimes per day.

Points: 1/1

Explanation: Close Explanation

If a competitive firm produces a positive output, it does so by choosing to produce the quantity at which market price (P ) is equal to marginal

cost (MC ). Therefore, if this firm chooses to produce wind chimes, it will produce 9,000 wind chimes per day, the quantity at which marginal
cost is equal to the price of $20 per wind chime.

It’s important to double-check that the firm will, in fact, choose to produce anything at all when the price is $20 per wind chime. A firm’s

decision on whether to produce in the short run depends on whether it can earn enough revenue to cover its variable cost. Because $20 is
greater than the lowest point on the average variable cost (AVC) curve, this condition is met.

On the preceding graph, use the blue rectangle (circle symbols) to shade the area representing the firm’s profit or loss if the market price is $20 and

the firm chooses to produce the quantity you already selected.

Note: In the following question, enter a positive number, even if it represents a loss.

The area of this rectangle indicates that the firm’s profit would be $72 thousand per day in the short run.

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Points: 0.5 / 1

Explanation: Close Explanation

Whether a firm experiences a positive profit or a loss is determined by the magnitude of total revenue versus total cost. In the short run, when

total revenue is larger than total cost, the firm is experiencing a positive profit; when total cost is larger than total revenue, the firm is

experiencing a loss (which is also called a negative profit).

Profit is equal to total revenue (TR ) minus total cost (TC ). Total revenue, in turn, is equal to price (P ) times quantity (Q):

TR = P × Q

Furthermore, since average total cost (ATC ) is equal to total cost divided by quantity produced, you can write total cost in terms of ATC and

Q:

TC
ATC = Q
TC = ATC × Q

Substituting TR = P × Q and TC = ATC × Q into the equation for profit results in the following:

Profit = TR − TC
= (P × Q) − (ATC × Q)
= (P − ATC) × Q

In other words, profit may be shown as a rectangle with a base of Q that stretches vertically to represent the difference of P − ATC . When
ATC is greater than P , this rectangle represents the firm’s loss.

Substituting P = $20 per wind chime, ATC = $16 per wind chime, and Q = 9,000 wind chimes per day into the equation for profit indicates
that the firm’s profit would be $36,000:

Profit = (P − ATC) × Q
= ($20 per wind chime − $16 per wind chime) × 9,000 wind chimes per day
= $4 per wind chime × 9,000 wind chimes per day
= $36,000

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8 . Deriving the short-run supply curve

Consider the competitive market for halogen lamps. The following graph shows the marginal cost (MC), average total cost (ATC), and average variable

cost (AVC) curves for a typical firm in the industry.

100

90

80

70
COSTS (Dollars)

60

ATC
50

40

30

20
AVC
10 MC

0
0 5 10 15 20 25 30 35 40 45 50
QUANTITY (Thousands of lamps)

For each price in the following table, use the graph to determine the number of lamps this firm would produce in order to maximize its profit. Assume

that when the price is exactly equal to the average variable cost, the firm is indifferent between producing zero lamps and the profit-maximizing

quantity. Also, indicate whether the firm will produce, shut down, or be indifferent between the two in the short run. Lastly, determine whether it will
make a profit, suffer a loss, or break even at each price.

Price Quantity
(Dollars per lamp) (Lamps) Produce or Shut Down? Profit or Loss?

10 0 Shut down Loss

20 Either 0 or 30,000 Either shut down or produce Loss

32 35,000 Produce Loss

40 37,500 Produce Loss

50 40,000 Produce Break even

60 42,500 Produce Profit

Points: 1/1

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Explanation: Close Explanation

If a competitive firm produces a positive output, it does so by choosing to produce the quantity at which market price (P) is equal to marginal

cost (MC). For example, the point on the MC curve with a height of $50 has a horizontal value of 40,000 lamps. Therefore, if the price of a lamp
is $50, the firm will produce 40,000 lamps. (Note: When price equals marginal cost at more than one quantity, the profit-maximizing quantity

must be the quantity where marginal cost is increasing. If marginal cost is decreasing, this means that increasing production by one more unit

would increase profit because marginal revenue would be larger than marginal cost. Therefore, production should continue until price equals
marginal cost in a region where marginal cost is increasing.)

A firm's decision on whether to produce in the short run depends on whether it can earn enough revenue to cover its variable costs. This is

because a firm's fixed costs must be incurred in the short run, regardless of whether the firm produces output. Because these costs must be
paid regardless of production, they are considered sunk and should not be taken into consideration in the short run. If the firm does not

produce a positive output in the short run, economists say it shuts down.

Graphically, the firm's shutdown price occurs at the price at which MC = AVC . This is because at the shutdown price, the firm must be
indifferent between the profit it earns when it produces and the profit it earns if it shuts down. You can see this in the following derivation using

total revenue (TR), fixed cost (FC), variable cost (VC), average variable cost (AVC), price (P), and quantity (Q):

Profit if Producing = Profit if Shut Down

TR − (FC + VC) = − FC
TR = VC
P × Q = AVC × Q
P = AVC

Therefore, the firm's shutdown price occurs when P = AVC . Since a competitive firm always chooses the quantity at which P = MC (if it

produces), this must correspond to the intersection of the MC and AVC curves. In this case, the firm's minimum AVC is $20 per lamp. Therefore,

if the market price is less than $20, the firm maximizes its profit by shutting down in the short run. If the market price is more than $20, the

firm maximizes its profit by producing in the short run. If the market price is exactly $20, the firm is indifferent between producing and shutting

down.

Profit is the difference between total revenue and total cost. Breaking this down even further yields the following result:

Profit = TR − TC
= P × Q − ATC × Q
= (P − ATC) × Q

Because a competitive firm sets P = MC , this means that the firm earns a positive profit if MC > ATC , breaks even (earns zero profit) if
MC = ATC , and is operating at a loss if MC < ATC .

On the following graph, use the orange points (square symbol) to plot points along the portion of the firm's short-run supply curve that corresponds
to prices where there is positive output. (Note: You are given more points to plot than you need.)

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100

90

Firm's Short-Run Supply

80

70
PRICE (Dollars per lamp)

60

50

40

30

20

10

0
0 5 10 15 20 25 30 35 40 45 50
QUANTITY (Thousands of lamps)

Points: 1/1

Explanation: Close Explanation

In the short run, the firm will produce as long as the market price is equal to or greater than the shutdown price of $20. For prices below $20,

the firm is unable to cover its variable costs and will shut down and not produce. For prices at and above $20, each point on the supply curve

corresponds to a point on the marginal cost curve. For example, at $20, the firm will produce 30,000 lamps because the marginal cost of the

final lamp at this quantity is $20; so this is a point on the firm's supply curve. At $50, the firm will produce 40,000 lamps, so this is another

point on the firm's supply curve.

Suppose there are 7 firms in this industry, each of which has the cost curves previously shown.

On the following graph, use the orange points (square symbol) to plot points along the portion of the industry’s short-run supply curve that

corresponds to prices where there is positive output. (Note: You are given more points to plot than you need.) Then, place the black point (plus

symbol) on the graph to indicate the short-run equilibrium price and quantity in this market.

Note: Dashed drop lines will automatically extend to both axes.

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100 Demand

90

Industry's Short-Run Supply

80

70
PRICE (Dollars per lamp)

60 Equilibrium

50

40

30

20

10

0
0 35 70 105 140 175 210 245 280 315 350
QUANTITY (Thousands of lamps)

Points: 0.5 / 1

Explanation: Close Explanation

For prices at and above the shutdown price of $20, the industry's supply curve corresponds to the horizontal summation of all firms' marginal

cost curves. For example, at $50, each firm will produce 40,000 lamps, so the industry supply at this price is

40,000 lamps per firm × 7 firms = 280,000 lamps .

The short-run equilibrium price and quantity occur at the intersection of the market demand and supply curves, which occurs at a price of $60

and a quantity of 297,500 lamps.

At the current short-run market price, firms will produce in the short run. In the long run, some firms will enter .

Points: 1/1

Explanation: Close Explanation

The supply and demand curves intersect at a price of $60 per lamp. This corresponds to a point on the marginal cost curve that is above each

firm's average total cost curve. Therefore, in the short run, firms in this industry are able to cover fixed costs and variable costs; thus, they earn

a positive profit.

The fact that firms in this industry are earning positive profit will encourage entry into the market. This entry by new firms will drive the market

price down until firms earn zero profit. At that point, firms not in the industry will have no incentive to enter, and firms in the industry will have

no incentive to exit, so the industry will be in long-run equilibrium.

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9 . Short-run equilibrium

Consider a perfectly competitive market for wheat in Philadelphia. There are 130 firms in the industry, each of which has the cost curves shown on the

following graph:

100

90
MC
80

70
COST (Cents per bushel)

60
ATC

50

40

30

20
AVC

10

0
0 5 10 15 20 25 30 35 40 45 50
OUTPUT (Thousands of bushels)

The following graph shows the market demand for wheat.

Use the orange points (square symbol) to plot the short-run industry supply curve for the wheat industry. Specifically, place an orange point at the

lowest point of the supply curve and another orange point at the highest point of the supply curve. (Note: You can disregard the portion of the supply

curve that corresponds to prices where there is no output, since this is the industry supply curve. Plot your points in the order in which you would like

them connected. Line segments will connect the points automatically.) Then, place the black point (plus symbol) on the graph to indicate the short-run
equilibrium price and quantity in this market. (Note: Dashed drop lines will automatically extend to both axes.)

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100 Demand

90

Supply Curve
80

70
PRICE (Cents per bushel)

60 Equilibrium

50

40

30

20

10

0
0 650 1300 1950 2600 3250 3900 4550 5200 5850 6500
QUANTITY (Thousands of bushels)

Points: 1/1

Explanation: Close Explanation

In the short run, the individual supply curve for a firm is the portion of the marginal cost curve that corresponds to prices greater than or equal

to the shutdown price of 25¢ (the price at which a firm is indifferent between producing and shutting down). At prices below 25¢, firms will not

produce in the short run. At 25¢, firms will produce a total of 30,000 bushels of wheat per firm × 130 firms = 3,900,000 bushels of wheat.
Therefore, (3900, 25) is the lowest point on the short-run industry supply curve. Similarly, at 85¢ per bushel, firms will produce a total of

50,000 bushels of wheat per firm × 130 firms = 6,500,000 bushels of wheat. Therefore, (6500, 85) is the highest point on the short-run industry
supply curve.

The short-run equilibrium price and quantity in this market occurs at the intersection of the market demand and market supply curves, which

occurs at a price of 40¢ and quantity of 4,550,000 bushels of wheat in this case.

At the current short-run market price, firms will produce in the short run. In the long run, some firms will exit the market
given the current market price.

Points: 0.5 / 1

Explanation: Close Explanation

The supply and demand curves intersect at a price of 40¢ per bushel. This corresponds to a point on the MC curve that is below each firm's ATC
curve but above its AVC curve. Therefore, in the short run, firms in this industry are able to cover their variable costs but not their fixed costs.

Therefore, firms are suffering a loss but will produce positive output in the short run.

The fact that firms in this industry are earning negative profit means that as time goes on, firms in the industry will exit in search of better

opportunities in other markets, rather than pay the fixed cost. This is because fixed costs are optional in the long run but not the short run. As

firms leave the market, the market price will rise until it is at the point at which firms earn zero profit. At this point, firms in this industry will

have no incentive to leave, and firms not in the industry will have no incentive to enter, so the industry will be in long-run equilibrium.

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10 . The long-run supply curve in different cost industries

The following graph shows the market for milk. Initially, the market is in a long-run equilibrium.

Suppose that a change in tastes resulted in a leftward shift in demand.

On the following graph, shift the demand or supply curve to reflect this change in tastes. Then use the grey point (star symbol) to indicate the new

short-run equilibrium.

Note: Select and drag one or both of the curves to the desired position. Curves will snap into position, so if you try to move a curve and it snaps back

to its original position, just drag it a little farther.

Your Answer Correct Answer

S
2
10

S
1 Demand
8
PRICE (Dollars per gallon)

6 Short-run Supply

4 Short-run Equilibrium

D
1
2
Long-run Equilibrium

D
2
0
0 2 4 6 8 10 Long-run Supply
QUANTITY (Thousands of gallons)

Points: 1/1

In the short run, firms will suffer economic losses . In the long run, the supply curve will shift leftward .

Points: 0.5 / 1

On the previous graph, show the shift in the supply curve and then use the purple point (diamond symbol) to indicate the resulting new long-
run equilibrium.

Explanation: Close Explanation

In the short run, the number of firms in the milk market is fixed. Therefore, the leftward shift in demand causes a movement along the short-

run supply curve. The price of milk falls, and each firm produces less than before.

Since the market is initially in long-run equilibrium, firms initially earn zero economic profit. Because the price of milk falls, firms suffer

economic losses in the short run, causing some firms to exit the industry. As firms leave the market, the supply curve shifts leftward, causing

prices to rise, until firms again earn zero economic profit, and the market is again in long-run equilibrium. This occurs at the intersection of the

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D2 demand curve and the S2 supply curve.

Comparing the two long-run equilibria on the graph, you can see that the milk market is an example of a constant-cost industry .

Points: 1/1

Explanation: Close Explanation

As you established in the first question, the lower price occasions negative economic profits, which incentivizes firms to decrease output and in

some cases leave the industry. The supply curve shifts left, finally settling at the intersection of S1 and D2 .

However, when demand decreases in a constant-cost industry, the decreased output does not affect input prices, which neither rise nor fall.

Thus firms’ average total cost curves are unaffected, and the price at which firms again earn zero economic profits (so that exit ceases) is the

same as the original price. This change is reflected on the graph at the intersection of S2 and D2 .

On the previous graph, use the green line (diamond symbols) to plot the long-run market supply curve for milk.

Explanation: Close Explanation

The long-run supply curve shows the result of a change in demand after the market has had time to reach its new long-run equilibrium. It
connects the initial long-run equilibrium with the final long-run equilibrium. Therefore, the long-run supply curve should cross the points of

intersection of S1 and D1 and S2 and D2 .

Because this is a constant-cost industry, the long-run market supply curve is horizontal, so that a leftward shift in demand results in the same

long-run market prices.

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11 . Thedemand curve facing a price taker

The following graph shows the daily market demand and supply curves. The equilibrium market price is $20 per large cardboard box.

40

36
Supply
32
PRICE (Dollars per large box)

28

24

20

16

12

Demand
4

0
0 1 2 3 4 5 6 7 8 9 10
QUANTITY (Millions of large boxes)

Suppose Cardboard Inc. is one of over a hundred perfectly competitive firms that produce large cardboard boxes for moving.

On the following graph, use the green line (triangle symbols) to plot the demand curve facing Cardboard Inc. for large cardboard boxes.

Hint: Remember that perfectly competitive firms can sell all their output at the going price.

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40

36

Demand
32
PRICE (Dollars per large box)

28

24

20

16

12

0
0 1 2 3 4 5 6 7 8 9 10
QUANTITY (Thousands of large boxes)

Points: 1/1

Explanation: Close Explanation

In a perfectly competitive market, many firms sell an identical product to many buyers. Therefore, if Cardboard Inc. charges even slightly more

for a box than other firms charge, it will lose all its customers, because every other firm in the industry is offering customers a lower price. In

other words, because a box from any other firm in the market is a perfect substitute for one of Cardboard Inc.'s boxes, if Cardboard Inc. were to

raise its price, its revenue would immediately fall to zero. Thus, a perfectly competitive firm faces a perfectly elastic (horizontal) demand for its

output at the current market price.

Additionally, Cardboard Inc. would not charge even slightly less than other firms charge, as Cardboard Inc. can already sell as many units of

output as it wants at the market price. Thus, lowering its price would only reduce Cardboard Inc.'s revenue.

In this case, the equilibrium market price is $20 per large box, so Cardboard Inc. faces a perfectly elastic demand curve for boxes at $20.

It is important to note that, although the demand curve of a perfectly competitive firm is perfectly elastic, the market demand curve of a

perfectly competitive market, as shown on the first graph, still follows the law of demand and is downward sloping.

In the following table, fill in the total and marginal revenues that Cardboard Inc. earns for the first three boxes it sells each day.

Total Output Price Total Revenue Marginal Revenue

(Boxes) (Dollars per box) (Dollars) (Dollars per box)

0 20 0
20
1 20 20
20
2 20 40
20
3 20 60

Points: 1/1

Explanation: Close Explanation

Calculate Cardboard Inc.'s total revenue by multiplying price (P ) and quantity (Q):

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Total Revenue = P x Q

Each large box that Cardboard Inc. sells earns the company $20 in revenue. Therefore, the marginal revenue from each large box sold is $20.

Total Output Price Total Revenue Marginal Revenue

(Boxes) (Dollars per box) (Dollars) (Dollars per box)

0 20 0
20
1 20 20
20
2 20 40
20
3 20 60

Note: The marginal revenue of a perfectly competitive firm is equal to the average revenue, or the price.

The demand curve that Cardboard Inc. faces is identical to which of its other curves? Check all that apply.

Its total revenue curve

Its marginal cost curve

Its supply curve

Its marginal revenue curve

Points: 1/1

Explanation: Close Explanation

A perfectly competitive firm faces a perfectly elastic (horizontal) demand curve at the market price. Thus, it can sell any quantity it chooses at

this price.

Because all units produced are sold at the market price, the change in total revenue that results from a one-unit increase in quantity sold is

equal to the price, and thus, the marginal revenue curve is a horizontal line at the market price. Therefore, the demand curve and marginal

revenue curve are identical.

The marginal revenue curve is derived from the total revenue curve and thus is not identical with the total revenue curve. The marginal cost

curve and supply curve reflect costs of production rather than revenues and thus are also distinct from the firm’s demand curve.

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12 . Individual Problems 8-1

The widget market is competitive and includes no transaction costs. Five suppliers are willing to sell one widget at the following prices: $52, $50, $40,

$36, and $26 (one seller at each price). Five buyers are willing to buy one widget at the following prices: $12, $24, $26, $36, and $40 (one buyer at
each price).

For each price shown in the following table, use the given information to enter the quantity demanded and quantity supplied.

Price Quantity Demanded Quantity Supplied

($ per widget) (widgets) (widgets)

$12 5 0

$24 4 0

$26 3 1

$36 2 2

$40 1 3

$50 0 4

$52 0 5

Points: 1/1

Explanation: Close Explanation

Buyers are willing to pay at or below their maximum willingness to pay. Thus, for each price, find the number of buyers willing to pay up to that
price. Sellers, on the other hand, are willing to sell at prices at or above their minimum willingness to sell. Thus, for each price, find the number

of sellers willing to sell for at least that price.

At a price of $12, any of the five buyers is willing to pay more than that price for a widget, so the quantity demanded is 5. However, this same

price is not enough to induce any suppliers to sell a widget, so the quantity supplied at this price is 0. In other words, $12 is below the minimum
selling price for all suppliers.

At a price of $24, only four buyers are willing to purchase widgets, as the individual who would buy a widget only for $12 is not longer willing to
purchase a widget at this higher price. Thus, the quantity demanded falls to 4. At this price of $24, it is still the case that no suppliers are willing

to sell a widget at this low of a price, so quantity supplied is 0. In other words, this price is below the minimum selling price for all suppliers.

The remaining quantities supplied and demanded can be determined in the same way.

The data are summarized in the following table:

Price QD QS

$12 5 0

$24 4 0

$26 3 1

$36 2 2

$40 1 3

$50 0 4

$52 0 5

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In this market, the equilibrium price will be 36 per widget, and the equilibrium quantity will be 2 widgets.

Points: 1/1

Explanation: Close Explanation

The equilibrium price is the price at which quantity supplied equals quantity demanded. This quantity, in turn, is the equilibrium quantity.

From the table you can see that, at a price of $36 per widget, the quantity supplied is equal to the quantity demanded at 2 widgets. Thus, the
equilibrium price is $36 per widget and the equilibrium quantity is 2 widgets.

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13 . Individual Problems 8-4

The following graph depicts the market for candy bars, currently in equilibrium.

Suppose there is rapid economic growth.

Shift either the supply curve or demand curve on the following graph to depict this rapid economic growth, then answer the questions that follow.

Your Answer Correct Answer

10

9
Supply
Demand
8

7
PRICE ($ per candy bar)

6 Supply
D
2
5

3
D
1
2

0
0 3 6 9 12 15 18 21 24 27 30
QUANTITY (Thousands of candy bars)

Points: 1/1

As a result of the rapid economic growth, the equilibrium quantity of candy bars has increased , and the equilibrium price has increased .

Points: 1/1

Explanation: Close Explanation

Any change in a factor that influences demand, other than price, will shift the demand curve. In this case, since rapid economic growth

increases incomes in the economy, consumers will purchase more candy bars at every given price. Thus, the rapid economic growth will shift the

demand curve to the right, increasing the equilibrium price and quantity of candy bars.

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14 . Individual Problems 10-2

To increase a company's profit, a manager suggests that the company needs to increase the value of its product to customers.

Suppose, per the manager's advice, the company successfully increases the value of its product to its customers. At the same time, however, the cost

per unit of the good increases by more than the price of the good increases.

Indicate whether profit per unit will increase, decrease, or stay the same (no change).

Hint: Think about the allocation of economic value for a product between cost, profit, and consumer surplus.

Increase Decrease No Change

Profit per Unit

Points: 1/1

Explanation: Close Explanation

The following graph depicts the allocation of economic value for a particular product, for a representative customer.

Consumer
DOLLARS PER UNIT

Surplus
Price per Unit

Profit
Consumer Value
Cost per Unit

Cost

Consumer surplus is the difference between customer value, or a consumer's maximum willingness to pay, and the price actually paid per unit.

Profit is the price received from the sale of that unit less the cost per unit.

In this case, if customer value is increased, but cost per unit increases by more than price per unit, then profit per unit will decrease. To see

this, suppose the price per unit is $300 and the cost per unit is $200. Unit profit is then $300 − $200 = $100 . If customer value is $400, then

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Aplia: Student Question 28/11/2021, 11:50 PM

consumer surplus is $400 − $300 = $100 . Suppose customer value now increases by $100, price increases by $50, and cost per unit increases
by $100. Consumer surplus increases to $500 − $350 = $150 , but profit decreases to $350 − $300 = $50 , since the difference between price
and cost per unit has decreased.

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15 . Individual Problems 10-3

True or False: As compared to tangible resources, human capital is likely to be a source of sustainable competitive advantage because it can be easily

imitated.

True

False

Points: 1/1

Explanation: Close Explanation

For a resource to deliver a sustainable competitive advantage, it must be difficult to substitute for or imitate. If a resource offers a temporary
competitive advantage but is easily substituted for or imitated, other firms will soon obtain that resource (or a similar one), and any competitive

advantage stemming from it will be lost.

Certain conditions make a resource particularly difficult to imitate:

1. The resource flows from a firm's unique history.

2. The link between the resource and the competitive advantage it confers is ambiguous.

3. The resource is socially complex.

In general, intangible assets (such as human capital or brand value) are more difficult to imitate than tangible assets, as the former are more
likely to meet one or more of the aforementioned criteria. For example, the brand value enjoyed by companies such as Apple or Starbucks

stems in part from the unique histories of these firms along with social factors. Human capital at a firm is also likely to be difficult to imitate,
since the knowledge and skills that constitute human capital are socially complex. Thus, brand value and human capital are both more likely to

be sources of sustainable competitive advantage than tangible assets, such as physical capital, which are often easier to duplicate.

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16 . Individual Problems 10-6

Ride sharing applications, such as Uber and Lyft, offer ground transportation at a lower cost than more standard forms of transportation, such as cab

services and car rentals. In some areas, regulators have banned Uber and Lyft, making it illegal to offer rides using these applications.

What group would you expect to be behind the efforts to ban ride sharing applications?

Gas station owners

Uber drivers

Cab drivers

Police officers

Points: 1/1

Explanation: Close Explanation

Cab drivers are most likely to support the ban, since Uber drivers can offer a similar service to that provided by cab companies. The advent of

ride sharing services represents an increase in competitive intensity in this industry and can lead to a decrease in profits for cab companies as
well as fewer jobs for cab drivers. One common way to reduce such competition is to lobby government officials to pass legislation to restrain

the entry of other firms into an industry.

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