Question

The graphs below illustrate the market for thingamajigs and the cost structure for a typical firm

in the market. The market is perfectly competitive. Answer all of the following questions based

on the diagram.

market typical firm MC 105 4400 5200 e 18 80 110 130 4 For questions 1-6, assume that market demand is D1. 1. Price will be dollars.

For parts 1-6 assume that market demand is D1.

1. Price will be _________ dollars.

2. Marginal Revenue will be ______ dollars.

3. Average revenue will be _______ dollars.

4. The typical firm will maximize profit by producing ________ units of output.

5. The firm's total revenue will equal ________ dollars.

6. The firm will earn a profit of _________ dollars.

Now assume that a change in consumer preferences causes the market

demand curve to shift to D2. Answer questions 7- 14 based on this

information.

7. Demand has __decreased / increased__ causing a _shortage / surplus_ at the previous equilibrium

price.

8. The new equilibrium price is _________ dollars.

9. If the typical firm produces at all, it would maximize profit by producing ______ units of output.

10. The firm's total revenue would equal _______ dollars.

11. Total cost would equal _______ dollars.

12. The firm would suffer a loss of ________ dollars.

13. If the firm shut down instead, it would suffer a loss of _______ dollars.

14. Thus the firm will operate in the short run. In fact, the firm will continue to operate at any price above

________ dollars.

15. How many firms are currently in this market? _________

Answer 1

1. From the market demand(D1) and supply(S) graph, the equilibrium is achieved at a price of $115

Ans: Price = $115

2. In a perfectly competitive market, for a firm, the marginal revenue at any output equals the market price

Ans: Marginal Revenue = $115

3. In a perfectly competitive market, for a firm, the average revenue at any output equals the market price

Ans: Average Revenue = $115

4. P = MC = $115 line intersects the MC curve for the given firm at a quantity = 130

Ans: The profit-maximizing quantity = 130 units

5. Total Revenue = Price * Quantity = $105 * 130 = $13,650

Ans: Total Revenue = $13,650

6. At the quantity of 130 units, the firms' ATC = $90

Total Cost = ATC * Quantity = $90 * 130 = $11,700

Profit = Total Revenue - Total Cost = $13,650 - $11,700 = $1,950

Ans: Profit = $1,950