Question

Figure 14-8 Suppose a firm operating in a competitive market has the following cost curves: 1. Refer to Figure 14-8. Which line segment best reflects the short run supply curve for this firm? a. ABCF b. CD c. DF d. BCD 24. Efficiency in a market is achieved when a. the sum of producer surplus and consumer surplus is maximized. b. a social planner intervenes and sets the quantity of output after evaluating buyers' willingness to pay and sellers' costs. c. all firms are producing the good at the same low cost per unit. d. no buyer is willing to pay more than the equilibrium price for any unit of the good. Figure 7-13 20 40 60 80 100 120 140 160 and 25. Refer to Figure 7-13. If the equilibrium price is $60, what is the producer surplus?

Answer 1

Solution:

23. Short run supply curve in a perfectly competitive firm is simply the marginal cost curve, starting from the shut down point. Shut down point occurs where the average variable cost is minimised; further AVC reaches its minimum where the marginal cost intersects average variable cost, at point C.

So, for price below C, quantity supplied is zero so supply curve is coinciding with vertical (or price) axis. Beyond C, supply curve is the marginal cost curve itself. Thus, supply curve is ABCF, making (a) the correct option.

24. Efficiency occurs when the valuation of buyer and seller meet for a particular good quantity. In other words, the buyers are willing to pay exactly what the sellers are willing to receive. This mainly occurs in a free market, when no intervention takes place. This efficiency point is also the point where consumer surplus and producer surplus (and hence, the total surplus in general) is maximised.

Thus, correct option is (a).