Marginal Cost, Revenue, and Pure Competition Assignment Worksheet Directions Thi

Question

Marginal Cost, Revenue, and Pure Competition Assignment Worksheet
Directions
This assignment deals with the recognition and application of pure competition cost and revenue information that is graphically presented. Use the graph below to answer the following questions.
Microeconomic Problem

1. How do you know that the firm represented in the graph above is a purely competitive firm?

2. To maximize profits, this firm will produce at what output level (one letter)?

3. Explain why this MR=MC position is the profit-maximizing position for any firm.

4. What is the product price (one letter)?

5. What is this firm’s average revenue (one letter)?

6. At profit-maximizing output, what is this firm’s average variable cost (one letter)?

7. At profit-maximizing output, what four letters indicate:
• Total revenue? (Remember, four letters—a rectangle.)
• Total cost?
• Total variable cost?
• Total fixed cost?
• Total economic profit?

8. If price falls below what point, this firm will not operate in the short run? (No letter needed, just an explanation.)

9. What will happen to this firm’s price, output, and economic profit in the long run? Why?

10. Where will the price settle in the long run? Remember, all purely competitive firms are theoretically doomed to make only normal profit in the long run. (Again, no letter answer, just an explanation.)

11. Why is the long-run equilibrium position of a purely competitive firm productively and allocatively efficient?

Explanation / Answer

1.) There is no graph above but a purely competitive firm will operate at the point in which MR=MC 2.) This will be the equilibrium quantity. So look where the marginal cost curve meets the marginal revenue curve and it will be this point on the X (horizontal) axis of the graph. 3.) MR=MC is the profit maximizing point because if the firm sold one more unit, i.e. MRMC, they could earn additional profits by selling the extra unit. 4.) Recall #2. Again, look where the curves intersect. The price will be at this point on the Y (vertical) axis of the graph. 5.) Average revenue is equal to the price. So it would be the same answer from #4. 6.) I can not tell without the graph :( sorry! 7.) Again, can not do much without the graph but the total revenue should be the box with the output and revenue (price) as ends, cost will be output and cost (price), total economic profit will the box between revenue and cost extending to the output. Thats the best I can do here. 8.) Average Variable Cost. 9.) Difficult to determine without graph, but the economic profit should diminish as competition increases over the long run. 10.) Price should settle at the point at which MR=MC or the point where demand=supply, same deal. 11.) Long run equilibrium is productively efficient because the firms are producing exactly what the need to be profit maximizing. It is allocatively efficient since in the long run the scarce resources are able to be used in a efficient manner that the market needs and has accurately priced. Feel free to PM or find me on twitter @jonathonrscott if you have any questions or you want to shoot me a picture of that graph.

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