chapter 9
Chapter 6
Perfectly Competitive Markets
1. A firm sells a product in a perfectly competitive market, at a price of $50. The firm has a fixed cost of $30. Fill in the following table and indicate the level of output that maximizes profit. How would the profit-maximizing choice of output change if the fixed cost increased from $40 to $60? More generally, explain how the level of fixed cost affects the choice of output.
The table is as follows:
Output
(Units)
Total Revenue
($/unit)
Total Cost
($/unit)
Profit
($)
Marginal Revenue
($/unit)
Marginal Cost
($/unit)
0
0
30
-30
50
1
50
80
-30
50
50
2
100
100
0
50
20
3
150
130
20
50
30
4
200
172
28
50
42
5
250
226
24
50
54
6
300
296
4
50
70
When the firm is producing a positive amount of output, profit is maximized when Q = 4, regardless of the fixed cost. The firm will produce another unit when MR > MC, and cut back production when MR < MC. The relationship between MR and MC is unaffected by fixed cost.
2. A bicycle-repair shop charges the competitive market price of $10 per bike repaired. The firm’s short-run total cost is given by STC(Q) = Q2/2, and the associated marginal cost curve is SMC(Q) = Q.
a) What quantity should the firm produce if it wants to maximize its profit?
b) Draw the shop’s total revenue and total cost curves, and graph the total profit function on the same diagram. Using your graph, state (approximately) the profit-maximizing quantity in each case.
a) Since the firm is producing in a perfectly competitive market, the firm views the output price as exogenous. It should produce up to the point at which P = SMC(Q), that is, so that 10 = Q. So it should produce 10 units of output.
b) The graph is shown below.
The total cost function increases in Q, and at an increasing rate. Total Profit at first increases in Q and then decreases. From the graph, it appears that Profit is maximized when Q is about 10, which we found in (a).
3. Dave’s Fresh Catfish is a northern Mississippi farm that
Perfectly Competitive Markets
1. A firm sells a product in a perfectly competitive market, at a price of $50. The firm has a fixed cost of $30. Fill in the following table and indicate the level of output that maximizes profit. How would the profit-maximizing choice of output change if the fixed cost increased from $40 to $60? More generally, explain how the level of fixed cost affects the choice of output.
The table is as follows:
Output
(Units)
Total Revenue
($/unit)
Total Cost
($/unit)
Profit
($)
Marginal Revenue
($/unit)
Marginal Cost
($/unit)
0
0
30
-30
50
1
50
80
-30
50
50
2
100
100
0
50
20
3
150
130
20
50
30
4
200
172
28
50
42
5
250
226
24
50
54
6
300
296
4
50
70
When the firm is producing a positive amount of output, profit is maximized when Q = 4, regardless of the fixed cost. The firm will produce another unit when MR > MC, and cut back production when MR < MC. The relationship between MR and MC is unaffected by fixed cost.
2. A bicycle-repair shop charges the competitive market price of $10 per bike repaired. The firm’s short-run total cost is given by STC(Q) = Q2/2, and the associated marginal cost curve is SMC(Q) = Q.
a) What quantity should the firm produce if it wants to maximize its profit?
b) Draw the shop’s total revenue and total cost curves, and graph the total profit function on the same diagram. Using your graph, state (approximately) the profit-maximizing quantity in each case.
a) Since the firm is producing in a perfectly competitive market, the firm views the output price as exogenous. It should produce up to the point at which P = SMC(Q), that is, so that 10 = Q. So it should produce 10 units of output.
b) The graph is shown below.
The total cost function increases in Q, and at an increasing rate. Total Profit at first increases in Q and then decreases. From the graph, it appears that Profit is maximized when Q is about 10, which we found in (a).
3. Dave’s Fresh Catfish is a northern Mississippi farm that