Homework Ch 12 Perfect Competition 1 In a perfectly competitive market the market demand is and the demand faced by the individual firm is shown by a downward sloping curve perfectly elastic 2 To maximize profit a firm in perfect competition must decide all of the following except what price to charge 3 Lin s makes fortune cookies Anyone can make and sell fortune cookies so there are dozens of producers All fortune cookies are the same and buyers and sellers know this fact Lin s fortune cookies operates in a market perfectly competitive The price of a fortune cookie is determined by Lin s marginal revenue from a fortune cookie equals market demand and market supply price 4 Lin s makes fortune cookies that are identical to those made by dozens of other firms and there is free entry in the fortune cookie market Buyers and sellers are well informed about prices If fortune cookies sell for 10 a box and Lin offers its cookies for sale at 10 50 a box Lin sells zero boxes If fortune cookies sell for 10 a box and Lin offers its cookies for sale at 9 50 a box Lin sells as many boxes as he wants 5 Quick Copy is one of the many copy shops near campus The graph shows Quick Copy s cost curves The market price of copying one page is 10 cents What is Quick Copy s marginal revenue Marginal Revenue the change in total revenue that results from a one unit increase in the quantity sold 10 cents 6 Choose the statement that is incorrect in a perfectly competitive market barriers to entry exist 7 In a perfectly competitive market the price of a handsaw is 25 When a firm maximizes its profit it produces 6 handsaws a day Draw the marginal curve label it Draw the marginal cost curve that illustrates the profit maximizing output Label it Draw a point at the profit maximizing output and price When marginal cost is greater than price the firm can increase economic profit by producing 1 less handsaw 8 Draw the marginal revenue curve for a firm in perfect competition that produces rubber boots when the market price is 10 per pair label it Draw the marginal cost curve label it Draw the average variable cost curve if the price occurs at minimum average variable cost label it Draw a point to indicate the shutdown point The lowest price at which a firm will produce is the price at minimum because at this price its loss equals average variable cost total fixed cost 9 Pat s Pizza Kitchen is a price taker The table shows Pat s total cost Calculate Pat s profitmaximizing output and economic profit When the market price is 14 a pizza Pat s profit maximizing output is pizzas an hour and her economic profit is dollars an hour 4 2 When the market price is 12 a pizza Pat s profit maximizing output is pizzas an hour and her economic profit is dollars an hour 3 5 When the market price is 10 a pizza Pat s profit0maximizing output is pizzas an hour and her economic profit is dollars an hour 2 10 10 The table show s Pat s total cost schedule Pat s Pizza Kitchen is a price taker What is the price at Pat s shutdown point 10 11 The market for paper is perfectly competitive and there are 1 000 firms that produce paper The top table sets out the market demand schedule for paper Each producer of paper has the costs shown in the bottom table when it uses its least cost plant size The market price is a box and the output produced by each firm is boxes 8 40 350 The quantity supplied by the market is boxes Each firm 350 000 incurs an economic loss of 581 a week 12 The market for smoothies is perfectly competitive The top table sets out the market demand schedule for smoothies Each of the 100 producers of smoothies has the costs show in the bottom table when it uses its least cost plant size The market price is a smoothie and the market quantity is smoothies an hour 2 91 700 The quantity produced by each firm is smoothies an hour Each firm 7 incurs an economic loss of 10 01 an hour 13 The shutdown decision total fixed cost total variable cost and total cost for GM does not change decreases decreases This shutdown decision maximizes GM s economic profit or minimizes its loss when price is less than Gm will start producing the Chevy Volt again when price is greater than average variable cost average variable cost 14 Joe s Shiney Shoes is a firm that operates in a competitive market