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1. Assignment A-4.1
List and explain the characteristics of perfect competition. Use examples.
A perfectly competitive market has the following characteristics.
(i) The market consists of buyers and sellers who are price takers.
(ii) Each firm in the market produces undifferentiated and homogenous products.
(iii) Buyers and sellers have perfect information about the price prevailing in the mark! About
the availability of commodities at any given point of time.
(iv) Firms can enter or exit the market freely.
The implications of all these features is that there is single price in the mark no individual buyer
can change it. On this price a firm can sell any amount of output. Because of flu demand of a
firm is perfectly elastic and hence a horizontal line at the market price. Another implication is
that a firm will produce only when it is profitable to produce, otherwise it will stop the products.
Example: A Perfectly Competitive Market is a market in which the buyers and sellers have a
belief that their selling and buying decisions do not any effect on the market price. This market
can only exist if there is homogeneity of products, low exit and entry barriers and a pure
knowledge about product price, cost and quality.
1. Assignment A-4.2
Draw the market demand and the demand of a single firm in perfect competition.
Draw and explain total revenue and marginal revenue.

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2. Assignment A-4.3
Identify when a firm should maximize profits, minimize losses or close down.
On occasion, when the firms only prospect is incurring losses, the same MC = MR rule
guides the entrepreneur to loss minimization. If the price at the loss-minimizing level of
output is high enough to cover average variable costs, the firm should continue to
produce in the short run. If the price at the loss-minimizing level of output is below
average variable costs, the firm should shut down, producing nothing to minimize losses.
Either way, the entrepreneur will face a loss because the firms fixed costs cannot all be
covered in the short run. If this situation persists into the long run, the entrepreneur will
go out of business.

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3. Assignment A-4.4
Establish that profit maximization is equivalent to marginal revenue being equal to
marginal cost in the short run. Show it in a graph.
Marginal revenue is the extra revenue generated when a firm sells one more unit of
output. It plays a key role in the profit maximizing decision of a firm relative to marginal
cost. A firm maximizes profit by equating marginal revenue, the extra revenue generated
from production, with marginal cost, the extra cost of production. If these two marginal
are not equal, then profit can be increased by producing more or less output.
The relation between marginal revenue and the quantity of output produced depends on
market structure. For a perfectly competitive firm, marginal revenue is equal to price and
average revenue, all three of which are constant. For a monopoly, monopolistically
competitive, or oligopoly firm, marginal revenue is less than average revenue and price,
all three of which decrease with larger quantities of output. The constant or decreasing
nature of marginal revenue is a prime indication of the market control of a firm.