ECON 500 – Spring 2007 Chapter 6 – “Perfectly Competitive Supply: the Cost Side of the Market” Questions from the textbook: Review questions 2, 4, and 5 (page 186). Problems 1, 2, 3, 6, 7, 8, and 9 (pages 186-189). Additional problems: 1) Consider a perfectly competitive firm operating in the Short Run. The only factor of production that the firm can vary is the amount of labor hired, denoted (L). The first two columns of the following table specify the relation between labor hired (L) and output produced (Q). L Q MPL F VC AFC AVC MC 0 0 na na na na 1 15 10 2 27 360 3 36 4 42 a. Complete the table above (filling in ALL blank cells). b. Does the “Law of Diminishing Marginal Returns” appear to hold? Explain. c. Assuming labor can only be hired in discrete, integer quantities, how much labor should be hired if the market price for the output of this firm is $16 per unit? How much profit is this firm able to earn? Explain. d. Redo part (c), instead supposing that the market price for the output of this firm is $25 per unit.2) Consider a perfectly competitive firm operating in the Short Run. Marginal Costs, Average Variable Costs, and Average Total Costs are illustrated below. For each of the prices below, determine the profit maximizing level of output and the resulting level of profit for this firm: a. 15.3=p b. 90.5=p c. 00.8=p d. 25.10=p $ q MC ATC AVC 1250 900 800 710 500 0 0 6.25 8.00 10.25 1375 5.90
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