Perfect Competition (45 points) (27 points) A perfectly competitive firm has the short-run marginal cost function, MC = 3 + 6Q + 3Q 2 Where K (capital) is fixed and L (labor)is variable. P K (price of...

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Perfect Competition (45 points)



  1. (27 points) A perfectly competitive firm has the short-run marginal cost function,


MC = 3 + 6Q + 3Q2

Where K (capital) is fixed and L (labor)is variable. PK
(price of capital) = $3 and P (price of output) = $48

  1. What is the profit maximizing level of Output? Show your work.

  2. Write the equation for Total Costs (TC).

  3. What is TC when profit is maximized?

  4. What is Total Revenue when profit is maximized?

  5. What is Total Profit when profit is maximized?

  6. Approximately, what is Q when ATC is minimized?

  7. Will firms enter or exit in the long-run? (explain your answer)

  8. (6 points) Graph the P, MC, MR, AR and ATC curves in P/Q space to correspond to your answers above. Make sure to label the values (with the numbers you have calculated above) for optimal Q and where the curves intersect optimal Q and where the curves intersect the vertical axis. Make sure to indicate/label profit/loss.



  1. (4 points) Describe the mechanism that adjusts the market to its long-run equilibrium.

  2. (4 points) Describe how a demand shock in a long-run constant cost industry results in a market long-run supply function that is horizontal.

  3. (6 points) In a perfectly competitive market, economic profit for each firm is supposed to be zero in the long-run. There are some industries in which positive economic profits seem necessary in order for these firms to survive in the long run (e.g., banking and pharmaceuticals – assume theses are perfectly competitive, even though they are not). What makes these industries special? Use one of them as a specific example. Should this economic profit be considered part of the cost curves? Give a reason for doing this. If this profit is subsumed into the cost curves, would economic profit be zero in the long run?

  4. (4 points) Explain why a perfectly competitive market is socially desirable.




Monopoly (32 points)

  1. (24 points) A monopolistic firm has the short-run marginal cost function,


MC = 20 + 4Q
Where K (capital) is fixed and L (labor)is variable. PK
(price of capital) = $10 and
Average Revenue is given by
P = 180-2Q
a. What is the profit maximizing level of Output? Show your work.

  1. Write the equation for Total Costs (TC).

  2. Write the equation for Total Revenue (TR)

  3. Write the expression for the market demand function.

  4. What is TC when profit is maximized?

  5. What is Total Revenue when profit is maximized?

  6. What is Total Profit when profit is maximized?

  7. Graph the P, MC, MR, AR and ATC curves in P/Q space to correspond to your answers above. Make sure to label the values (with the numbers you have calculated above) for optimal Q and where the curves intersect optimal Q and where the curves intersect the vertical axis. Make sure to indicate/label profit/loss.


2. (2 points) What assumption is relaxed on the perfectly competitive market to obtain a monopolistic market?
3. (2 points) Explain why a monopoly is not socially desirable.
4. (4 points) What is a natural monopoly? Why do governments allow the operation of natural
monopolies? Why do governments impose regulations on natural monopolies?

Monopsony (5 points)



  1. (2 points) Briefly describe the conditions for monopsony.

  2. (3 points) Show that L (quantity of labor) is lower and PL
    is higher than in the perfectly competitive labor market.




Monopolistic Competition (18 points)



  1. (8 points) Explain monopolistic competition. Include in your explanation the characteristics that determine the degree of monopolistic competition.

  2. (10 points) Discuss Khalid’s proposed business in terms of a competitive market and in terms of a monopolistic competitive market. Which type of market structure (competitive or monopolistic competitive) might he hope develops? Why? Does that development depend on him? Explain.

Answered Same DayDec 31, 2021

Answer To: Perfect Competition (45 points) (27 points) A perfectly competitive firm has the short-run marginal...

Robert answered on Dec 31 2021
115 Votes
1
ECO 555
Final Exam
Perfect Competition (45 points)
1. (27 points) A perfectly competitive firm has the short-run marginal cost function,
MC = 3 + 6Q + 3Q2
Where K (capital) is fixed and L (labor)is variable. PK (price of capital) = $3 and P (price of output) = $48
a. What is the profit maximizing level of Output? Show your work.
E
quate MR with MC
MR= 48
3Q2+6Q +45= 0
Q= 3
b. Write the equation for Total Costs (TC).
3*K’ + wL
where K’ is the amount of K used.
c. What is TC when profit is maximized?
TC= VC+FC = 3Q +3Q2 +Q3 +F
= 117 + F
where F = capital costs = 3K’
Since you say that answer is 63. This cant be found unless we know L and K levels. we need some production function for this analysis.
d. What is Total Revenue when profit is maximized?
Tr=48*3=144
this is correct
e. What is Total Profit when profit is maximized?
profits= 144-117-3K’ =27 -3K’
we need costs to get this
f. Approximately, what is Q when ATC is minimized?
When the firm is in long run equilibrium, the minimum ATC = P
so ATC= 48.
we need costs to get this answer
g. Will firms enter or exit in the long-run? (explain your answer)
Cant say
depends on and in f
h. (6 points) Graph the P, MC, MR, AR and ATC curves in P/Q space to correspond to your answers above. Make sure to label the values (with the numbers you have calculated above) for optimal Q and where the curves intersect optimal Q and where the curves intersect the vertical axis. Make sure to indicate/label profit/loss.
we need to know if losses/ profits are made to draw diagram for ATC.
2. (4 points) Describe the mechanism that adjusts the market to its long-run equilibrium.
If a firm makes losses in short run then some firms will exit the industry. This will reduce the industry supply so that price rises. The rise in price causes revenues to rise for the remaining firms, allowing losses to decline. This continues till the price reaches a level where TR= TC and normal profits are made.
If a firm makes profits then new firms will enter the industry, causing industry supply to expand. the price will fall, causing revenues to fall and profits will decline. This decline will continue as long as abnormal profits continue and new firms keep entering the industry. When profits reach zero the industry is in long term equilibrium.
.
3. (4 points) Describe how a demand shock in a long-run constant cost industry results in a market long-run supply function that is horizontal.
Let demand rise in this industry. The industry demand curve shifts out so that price rises to P1. This causes abnormal profits to be made, inviting other firms to enter
The excess profits in short run encourage new firms to enter this industry. This will increase supply so that supply curve shifts down to S2, reducing price level. This shift continues till abnormal profits are made. Price keeps falling till it reaches its old level. The new equilibrium in long run is at E2, where price is same but industry quantity is higher. The output of each mine remains same, only the no of mines rises to increase the total industry supply. In this scenario the industry is a constant cost industry, where rising demand for the good does not increase the cost of inputs.( see diagram below)
4. (6 points) In a perfectly competitive market, economic profit for each firm is supposed to be zero in the long-run. There are some industries in which positive economic...
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