Question

1. What type of demand curve does a perfectly competitive firm face? Why?

2. A perfectly competitive firm has the following fixed and variable costs in the short run. The market price for the firm’s product is $150.
       Output   FC   VC   TC   TR   Profit/Loss
               0   $100   $    0   ___   ___   ___
       1       100   100   ___   ___   ___
       2       100   180   ___   ___   ___
       3       100   300   ___   ___   ___
       4       100   440   ___   ___   ___
       5       100   600   ___   ___   ___
       6       100   780   ___   ___   ___
       a.   Complete the table.
       b.   At what output rate does the firm maximize profit or minimize loss?
       c.   What is the firm’s marginal revenue at each positive level of output? Its average revenue?

Answer 1

1. What type of demand curve does a perfectly competitive firm face? Why?

Answer:

perfectly elastic demand (Horizontal demand curve).

Why?

because they are price taker. so they charge market price. at any quantity price will be same. so it has perfectly Elastic demand curve that is horizontal demand curve.

2.

a.   Complete the table.

Q	FC	VC	TC	TR	profit
0	100		100	0	-100
1	100	100	200	150	-50
2	100	180	280	300	20
3	100	300	400	450	50
4	100	440	540	600	60
5	100	600	700	750	50
6	100	780	880	900	20

TR=Price*Q

TC=TVC+TFC

profit=TR-TC

b.   At what output rate does the firm maximize profit or minimize loss?

Answer:

4 unit.

explanation: firm maximizes its profit where, MR=MC. but in this case MR is not equal to MC at any quantity so we will select the quantity where MR is greater than MC before MC starts becoming greater than MR. so here at quantity 4 MR is Greater than MC before MC starts becoming greater than MR.

Q	FC	VC	TC	TR	profit	MR	MC
0	100		100	0	-100
1	100	100	200	150	-50	150	100
2	100	180	280	300	20	150	80
3	100	300	400	450	50	150	120
4	100	440	540	600	60	150	140
5	100	600	700	750	50	150	160
6	100	780	880	900	20	150	180

MC=change in TC/change in quantity

MR=change in TR/change in quantity

c.   What is the firm’s marginal revenue at each positive level of output? Its average revenue?

Q	FC	VC	TC	TR	profit	MR	MC	AR
0	100		100	0	-100
1	100	100	200	150	-50	150	100	150
2	100	180	280	300	20	150	80	150
3	100	300	400	450	50	150	120	150
4	100	440	540	600	60	150	140	150
5	100	600	700	750	50	150	160	150
6	100	780	880	900	20	150	180	150

MR=change in TR/change in quantity

AR=TR/Q

Note : in perfect competition AR=MR=price.