45 CENGAGE | MINDTAP Practice Assignment6 Fall21 1. Market structures For each scenario in the following table, determine which market model best describes the scenario, Then identify the number of firms, the type of product, and the ease with which new firms can enter the market under this market structure. Scenario Hundreds of colleges serve millions of students each year. The colleges vary by location, size, cost, and educational quality, which allows students to match schools to their diverse preferences. Dozens of companies produce plain white socks. The standard technology for producing socks is widely known and available to anyone who wants to start the business. Three airlines operate between San Francisco and San Diego. There are not enough potential customers to share the route with a fourth airline without causing the average costs of the existing competitors to rise substantially. Consumers view all airlines as providing the same service and will select the least expensive one. Only one pharmaceutical company has a government Patent to sell an experimental drug. Number of Firms Many ¥ Many ¥ Few ¥ One ¥ Standardized _V Unique v Challenging ¥ Impossible ¥ Q Search this Market Model Price-searcher_¥ Monopoly ¥ fs Points: Samm 1 / 1CENGAGE | MINDTAP Practice Assignments Fall21 2. Characteristics of competitive markets ‘The model of competitive markets rees on these three cre assumptions: 1, There must be many buyers and sllers~a few players cant dominate the mark 2. Firms must produce an dential product buyers must regard all sles’ product as equveen 3. Firms and resources must be fly moble, slowing free entry ita and ex frm the indy ‘The fest two conditions imply thet al consumers ond firms ae price takers. Wile the thirds nt necessary for price-taking behavior assume fr this ‘problem that market cannot maintain competition inthe long run without re en, “Wenity whether or not exch of the flowing scenarios describes 3 competiove market, long With the correct explanation of why or hy not. Scenario competitive? ‘No, not many sellers —_¥ ‘In smal town, thre are two providers of broadband Intemet acces: a cable company land tne phone company. The Internet access offered by bath provers eof the same speed No,nores entry _¥ ‘The government has granted 2 patent to a pharmaceutical company for an experimental, ‘NOS erug. That company isthe only fm permite to sel the aru, search this course42 CENGAGE | MINDTAP Q Search this course Practice Assignmenté Fall21 and the phone company. The Intemet access offered by both providers is ofthe same speed. 1 no free entry ‘The government has granted a patent to @ pharmaceutical company for an experimental Ho, ne freee a [AIDS drug. That company isthe only firm permitted to sell the drug. Yes, meets all assumptions_¥ Dozens of companies produce plain white sacks. Consumers regard plan white socks as «ese ests all assumptions Identical and don't care who manufactures their socks. No, not an identical product_¥ In a major metropoltan area, one chain of coffee shops has gained a large market share because customers feel ts coffee tastes better than that of its competitors. Points: mmm 1/1 Explanation: Close Explanation eee a ; ‘The sock market is the only one of these options that is a competitive market. Because the pharmaceutical company is the only legal provider of ince there is only one seller and the good is unique, the answers No, not the experimental AIDS drug, there isn't free entry into that market. many sellers and No, not an identical product would also be accepted. Because a few firms dominate the broadband Internet market, they are not price takers. Finally, consumers regard the products offered by various coffee shops as different, so the coffee market is not characterized by an identical productZF CENGAGE | MINDTAP Q seareniniscourse @ Practice Assignment6 Fal21 © > ‘Tne foloming graph stows the daly man fo large cardbear boxes i Mem 7 | Wt [RICE (ta one)‘CENGAGE | MINDTAP search tis course Practice Assignments Fall21 ‘Suppose that alr sone of more than 3 hundre competitive fms in Mam tat produce such cardboard bots. ‘sed on te preceingaraph showing the dy markt demand and supply curves, the price Flere mus take a Siven [HD Poles: mmm 2/2 Close Explanation = Esanation Ina compettie mart, many rms ean ential prosuct to many buyers. Therefore, Flere charges even sgh more fora box than comer fms ererge wil lea ts customers because ever te rm in hens s fering lowe ic, Tn ther wor, one of Faler's boxes 8 perfect substitute or boxes tom the factry next der or rom any ater factory. On the ater han, if Far cherges es than what ter fms cnarge aero would also be worse of Because the quart sald woud remain the same inet frm cn sendy sll as much output a8 wants tthe market price) But the revenue from each uni ol wou be lower. Thus, a a compettive fir, Fler must accept the pice of $20 per are Box as ven. In ether words, faces a perfect elastic (terior demand cre for is Oput tthe current market rice (mtn ase, $20 per lrg box). The green ine on he flowing raph lutrates the demand cre fo Fale lrg cardboard totes @4.2 CENGAGE | MINDTAP Q ‘Search this cours Practice Assignment6 Fall21 Itis important to note that while the demand curve of a competitive firm is perfectly elastic, the market demand curve of a competitive market (as shown on the first graph), still obeys the law of demand and is downward sloping. Frill in the price and the total, marginal, and average revenue Falero earns when It produces 0, 1, 2, or 3 boxes each day. Quantity Price Total Revenue Marginal Revenue Average Revenue (Boxes) (Dollars per box) (Dollars) (Dollars) (Dollars per box) ° 20¥ ° - 20v 1 20 ov [av 20 2 20¥ ov 20¥ 20v - 200 Ov 200 » F Points: Sm 1 / 1 Explanation: Close Explanation Because the market is competitive, Falero is a price taker. Thus, no matter how many boxes it sells, it receives $20 for each one. You can calculate Falero's total revenue by multiplying price and quantity: Total Revenue = Price x Quantity = $20 per bax x 1 box* CENGAGE | MINDTAP Practice Assignment6 Fall21 Each large box that Falero sells earns the company $20 In revenue. Therefore, the marginal revenue from each large box sold is $20. ‘Average revenue is equal to total revenue divided by quantity: “oon plod Average Revenue So, Falero's average revenue is equal to the market price of $20. ‘The demand curve that Falero faces is identical to which ofits other curves? Check all that apply. Marginal cost curve Y @ Marginal revenue curve VG Average revenue curve ¥— Supply curve45 CENGAGE | MINDTAP Q Search th Practice Assignment6 Fall21 4. Short-run supply and long-run equilibrium Consider the competitive market for steel. Assume that, regardless of how many firms are in the industry, every firm in the industry is identical and faces the marginal cost (MC), average total cost (ATC), and average variable cost (AVC) curves shown on the following graph. @ COSTS (Dollars per ton)4.2 CENGAGE | MINDTAP Q Search this course Practice Assignmenté Fall21 Use the orange points (square symbol) to plot the initial short-run industry supply curve when there are 20 firms in the market. (Hint: You can ‘isregard the portion of the supply curve that corresponds to prices where there is no output since this Is the industry supply curve.) Next, use the purple points (diamond symbol) to plot the short-run industry supply curve when there are 40 firms. Finally, use the green points (triangle symbol) to plot the short-run industry supply curve when there are 60 firms. @ Comet Answer Your Anewer o v ‘Supply (20 fms) ; - u fe ‘Supply (40 firms) ae eee z oy ( ¢ s A = v 4g Supa (60 frm) Eg re 9 20 240 380 480 600 720 840 960 1000 1200 8 QUANTITY (Thousands of tons)CENGAGE | MINDTAP Q search Practice Assignment6 Fall21 Explanation: Close Explanation Inthe short run, a competitive fm will produce as long as the market price Is equal to or greater than the shutdown price of $16. For prices below $16, firms in this industry are unable to cover their variable costs and wil shut down and, thus, not produce. For prices above $16, the Industry's supply curve corresponds tothe horizontal summation of al firms’ marginal cost curves. For example, ata price of $16, each firm wil produce 12,000 tons of steel. Therefore, 20 firms would supply a total of 12,000 tons per firm x 20 firms = 240,000 tons at that price, 40 firms would supply & total of 12,000 tons per firm x 40 firms = 480,000 tons, and 60 fms would supply a total of 12,000 tons per firm x 60 firms = 720,000 tons. To construc the rest ofeach supply curve, you can perform similar calculations at prices of $40, $52, $64, and $80 per ton. 1 there were 60 Firms in this market, the short-run equlibrium price of steel would be[#2d per ton. At that price, firms inthis Industry would ‘operate at aloss _¥ Therefore, in the long run, firms would exit the steet market. Points: mm 1/1 Explanation: Close Explanation ~ ‘The short-run industry supply curve with 60 firms intersects the demand curve ata price of $40 per ton of steel. This corresponds to a point on ‘the marginal cost curve that Is below each firm's average total cost curve. Therefore, inthe short run, fms inthis industry ae able to cover only variable costs and not allied costs; thus, they earn a negative prof. “The fact that firms In this Industry ate earning @ negative profit means that, as time goes on firms in the industry wil exit in search of better ‘opportunities in other markets rather than continue to pay the fixed cost, because fixed costs are optional inthe long run, but not the short run. ‘As firms leave the market, the market price wil rise until it sat the point at which firms earn zero profit. AE this point, firms inthis industry will hhave no incentive to exit, and firms not inthe industry wil have no incentive to enter, o the Industry wil be In long-run equllrium.£2 CENGAGE | MINDTAP Practice Assignmenté Fall21 e until is at the point at which firms earn zero profit. At this point, firms in this industry wil jave no incentive to enter, so the industry will be in long-run equilibrium. As firms leave the market, the market price wi have no incentive to exit, and firms not in the industry will Because you know that competitive firms earn __zero___¥ economic profit in the long run, you know the long-run equilibrium price must be [$52 ¥ per ton, From the graph, you can see that this means there will be 20_v firms operating in the steel industry in long-run equilibrium. 1S Points: mmm 1/1 Close Explanation « Explanation: In the long run, firms will enter the industry if they can earn a positive profit, and firms will exit the industry if they are running at a loss. In long-run equilibrium, firms have no incentive to either enter or exit the industry, which means that firms in the industry must be earning zero profit. Profit is the difference between total revenue and total cost. Breaking this down even further yields the result that profit equals (P - ATC) x Q. Because profit per unit is measured by P — ATC, and because competitive firms produce at the point at which price equals marginal cost (MC), firms earn zero profit when P = ATC = MC. Looking at the preceding cost-curve graph, you can see that this occurs at a price of $52 per ton. Note also that price equals ATC at the point where ATC reaches a minimum. The level of production corresponding to the lowest average total Ibrium of a competitive market with free entry and exit, firms must be cost is called the firm's efficient scale; therefore, in the long-run eq ‘operating at their efficient scale. From the preceding graph, you can see that the short-run equilibrium price Is $52 per ton if there are 20 firms in the steel industry, indicating that $52 per ton is the long-run price. Therefore, if there are 20 firms in the industry, firms will have no incentive to enter or exit the market.CENGAGE | MINDTAP Practice Assignment6 Fall21 “rue or Fase: Assuming implicit costs are positive, each ofthe Frmns operating in this industry inthe long run earns negative accounting profit. Tue ¥ 0 Fase 5 Points: mm 1/3 Explanation: Gose Explanation « ‘Accounting profits defined as total revenue minus the sum of all explicit costs: Accounting Profit = Total Revenue ~ Explicit Costs Economic profit, by contrast, is defined as total revenue minus the sum of explicit costs and implicit costs: Economle Profit = Toal Revenue ~ (Explicit Costs + Implicit Coss) Total Revenue ~ Explicit Costs ~ Implicit Covts“» CENGAGE | MINDTAP © search Practice Assignment Fall21 ‘5. Short-run and long-run effects of a shift in demand ‘Suppose thatthe turkey industry isin long-run equilbrium at a price of $5 per pound of turkey and a quantity of 400 millon pounds per year. Suppose ‘that WebMD claims that the bacteria found in turkey will decrease your expected lifespan by 2 years. WebMD’s claim will cause consumers to demand less _v turkey at every pric. In the short run, firme will respond by producing less turkey and running at a loss v Points: mm 1 2 Explanation: (Glose Explanation ~ WebMD's claim causes the quantity of turkey demanded to decrease at every price, shifting the demand curve inward. In the short run, the number of firms in the turkey industry is fed. Therefore, the shit in demand causes @ movement along the short-run supply curve. The pice of turkey decreases, and each firm produces less turkey than before, Because the turkey industry was eriginally in long-run equilibrium, fms were earring zero profit before WebMO’s cai. Therefore, a decrease In price would cause firms to run at 2 loss. ‘Shift the demand curve, the supply curve, or both on the following graph to lustrate these short-run effects of WebMDYs caim. @422 CENGAGE | MINDTAP Q Search this cot Practice Assignment6 Fall21 ‘Shift the demand curve, the supply curve, or both on the following graph to illustrate these short-run effects of WebMD’s claim. , v su ; y Demand ge? em, Be ‘supply g gs é, 8 Es 0 a 160 240 320 400 480 580 640 720 800 QUANTITY (Millions of pounds)CENGAGE | MINDTAP- Q Search this cour Practice Assignment6 Fali21 [QUANTITY (ons pounds) In the fong run, some rms wil respond by. ‘exiting the industry Y unt ‘each firm in the industry i once again earning z0r0 ‘. explanation ‘Since WebMO's claim caused the price of turkey to decreas, firms inthis industry began running ta loss. Inthe short run, the numberof fms. In the turkey industry was fixed, but inthe long run, frms in the turkey industry that earn negative profit wl ext the market. This process ‘continues unt firms are once again earning zero prot. ‘Shit the demand curve, the supply curv, or both on the following graph to lustrate bath the short-run effects of WebMD's claim and the new long- ‘un equlibrium after frms and consumers fnish adjusting tothe news.4 CENGAGE | MINDTAP Q Search this Practice Assignment6 Fall21 ‘Shift the demand curve, the supply curve, or both on the following graph to ilustrate both the short-run effects of WebMD’s claim and the new long- run equilibrium after firms and consumers finish adjusting to the news. Your Answer PRICE (Dollars per pound) aad eee os QUANTITY (atone of pounds)2 CENGAGE | MINDTAP Q Search this course Practice Assignment6 Fall21 ‘exit the market. As they do, the supply curve will shift to the left, raising the short-run equilibrium price. This process continues until firms are ‘once again earning zero profit. ‘The new equilibrium price and quantity suggest that the shape of the long-run supply curve in this industry Is_horizontal_V in the long run. Points: sam 1/1 Explanation: Close Explanation In the long run, firms enter or exit the market until profit is equal to zero or when price is equal to the minimum of average total cost. When all ice because no other price can sustain the zero- ium price in the long run returns to the minimum of firms have identical cost structures, the long-run market supply curve is horizontal profit condition for all firms. This is suggested by the preceding graph, where the average total cost of $5. 's possible for the long-run market supply curve to be upward sloping. In this case, the lorig- m (the last firm to enter or exit the market) earns zero profit. In other words, the market However, when the cost structure of firms v run condition requires that at least the margi reaches long-run equllibrium when it would not be profitable for any additional firms to enter or exit this market even if existing firms with lower costs are making positive profit in the short run. ‘Another reason the long-run market supply curve might be upward sloping is if some resources used in production (such as land) are avallable ‘only in limited quantities. In this case, greater demand for a good may cause the price of that limited Input to rise, which, in turn, raises the industry costs of production of that good, causing the long-run market supply curve to slope upward.4. CENGAGE | MINDTAP Q Search this course Practice Assignmenté Fall21 6 . Profit maximization using total cost and total revenue curves ‘Suppose Musashi runs a small business that manufactures teddy bears. Assume that the market for teddy bears is a competitive market, and the market price is $20 per teddy bear. ‘The following graph shows Musashi's total cost curve. Use the blue points (circle symbol) to plot total revenue and the green points (triangle symbol) to plot profit for teddy bears quantities zero through ‘seven (inclusive) that Musashi produces. Your Answer Correct Anewer | 8 | 20 o 1 v Total Revenue 180 % od 28 ¥ Proft ‘TOTAL COST AND REVENUE (Dollars) @ 3 \4° CENGAGE | MINDTAP Practice Assignmenté6 Fall21 0 1 2 o. 4 5 6 7 QUANTITY (Teddy bears) If Points:4% CENGAGE | MINDTAP Practice Assignmenté Fall21 Explanation: Close Explanation ~ Total revenue is equal to price times quantity. Therefore, the total revenue curve is an increasing line with a slope of $20 per unit. Profit is equal to total revenue minus total cost. The following table captures the data needed to plot the total revenue curve and profit curve: Quantity =Total Revenue Total Cost —Profit (Teddy bears) (Dollars) (Dollars) (Dollars) 0 0 20 -20 1 20 35 -15 2 40 40 0 3 60 45 15 4 80 55 25 5 100 70 30 6 120 95 25 7 140 125 15 Calculate Musashi's marginal revenue and marginal cost for the first seven teddy bears he produces, and plot them on the following graph. Use the blue points (circle symbol) to plot marginal revenue and the orange points (square symbol) to plot marginal cost at each quantity.4s CENGAGE | MINDTAP Practice Assignmenté Fall21 Calculate Musashi's marginal revenue and marginal cost for the first. , tov AN blue points (circle symbol) to plot marginal revenue and the orange, AN adee) i wuyel aie COSTS AND REVENUE (Dollars per teddy bear) Q Search this course‘s CENGAGE | MINDTAP Practice Assignment6 Fall21 ‘Marginal revenue is equal to the addtional revenue earned for each additional teddy bear sold. For a competitive frm, marginal revenue is ‘always equal to the market price. Since Musashi can sell as many teddy bears as he can make at a price of $20 per teddy bear his marginal ‘revenue from selling any given teddy bear Is $20. ‘Marginal cost is the change in cost when Musashi increases production by one teddy bear. You can find this by calculating the difference ‘between each total cost given in the following table. For instance, the marginal cost of the fourth teddy bear ($10) is equal to the total cost of producing four teddy bears ($55) minus the total cost of producing three teddy bears ($45): Quantity ‘Total Revenue Marginal Revenue Total Cost Marginal Cost (Teddy bears) (Dollars) (@oltars) (Dollars) (Dollars) ° ° 20 AMAA 20 15 \\\ 1 20 3 35 \ 2 40 40 » \ 20 5 \\ 3 60 a 45 Wy 4 80 55 20 45 5 100 70 20 25 6 120 95 20 2 30 7 140 325 Musashi's profit is maximized when he produces|[S WV teddy bears. When he does this, the marginal cost of the last teddy bear he produces is [Fi5_v’, which is_tess__v than the price Musashi receives for each teddy bear he sells. The marginal cost of producing an additional teddy JY which is greater the price Musashi receives for each bear (that is, one more teddy bear than would maximize his proft)is[s4% CENGAGE | MINDTAP Q Search this course Practice Assignmenté Fall21 Musashi's profit is maximized when he produces |[5_ teddy bears. When he does this, the marginal cost of the last teddy bear he produces is [S15___V_,whichis_tess__v than the price Musashi receives for each teddy bear bear (that is, one more teddy bear thi a ° i Explanation: Close Explanation « first 5 teddy bears that Musashi produces, the marginal cost ( receives from selling the tedbiy bear. Beyond the fifth teddy bear he produces each hour, the marginal cast of producing that teddy bear is greater than the price Musashi receives for it therefore, choosing ta Produce more than 5 teddy bears reduces Musashi's profit. MC) of producing each teddy bear is less than the marginal revenue (Ml Because MR > MC ($20 > $15) to the left of the optimal quantity and MR < MC ($20 < $25) to the right of the optimal quantity, the optimal ‘quantity corresponds to the intersection of the marginal cost and marginal revenue curves. (Note: When the two curves intersect between discrete values, the optimal quantity occurs at the greatest quantity where marginal cost is below marginal revenue.) Furthermore, since ‘marginal revenue is always equal to price (P) for a firm in a competitive market, the optimal quantity for such a firm is the one at which P=MC.4 CENGAGE | MINDTAP Q Search this co Practice Assignmenté Fall21 7 . Profit maximization In the cost-curve diagram ‘Suppose that the market for dress shirts is a competitive market. The following graph shows the daily cost curves of a firm operating in this market. Hint: After placing the rectangle on the graph, you can select an endpoint to see the coordinates of that point. @ ee, Profit or Loss BR es 8s a B PRICE (Doltars por shit)4% CENGAGE | MINDTAP ‘e-3earcrrtnis cour Practice Assignments Fall21 In the short run, at a market price of $15 per shirt, this firm will choose to produce _8,000_¥ shirts per day. (8 Polnts: mmm 1 71 Explanation: Close Explanation ~ If 2 competitive firm produces a positive output, It does so by choosing to produce the quantity at which market price (P) is equal to marginal cost (MC). Therefore, if this firm chooses to produce shirts, it will produce 8,000 shirts per day, the quantity at which marginal cost is equal to _ the price of $15 per shirt. _It’s Important to double-check that the firm will, in fact, choose to produce anything at all when the price is $15 per shirt. A firm's decision on | whether to produce In the short run depends on whether it can earn enough revenue to cover its variable cost. Because $15 Is greater than the lowest point on the average variable cost (AVC) curve, this condition is met. On the preceding graph, use the blue rectangle (circle symbols) to shade the area representing the firm's profit or loss if the market price is $15 and the firm chooses to produce the quantity you already selected. Note: In the following question, enter a positive number, even if it represents a loss. ‘The area of this rectangle indicates that the firm’s loss_W would be[$i20 _ ¥ thousand per day in the short run. » 5 Points: Samm 1/1"= into: 422 CENGAGE | MINDTAP & Dee Practice Assignment6 Fall21 Explanation: "Close Explanation « I cost. In the short run, when revenue, the firm is | Whether a firm experiences a positive profit or a loss is total revenue is larger than total cost, the firm is exper experiencing a loss (which is also called a negative profit _ Profit is equal to total revenue (TR) minus total cost (7C) TR = PxQ Furthermore, since average total cost (ATC) is equal to total cost Q: total cost in terms of ATC and aa Bela x ss Substituting TR = P x Q and TC = ATC x Q into the equation for profit results in the following: Profit = TR-TC7 v=) intoa 41 CENGAGE | MINDTAP 3ea Practice Assignmenté Fall21 Substituting TR = P x Q and TC = ATC x Q into the equation for profit results in the following: Profit = TR-TC = @xQ)- «Tex 9), = @-ATCE) xO In other words, profit may be shown as a rectangle with a base of Q that stretches vertically to represent the difference of P — ATC. When ATC ts greater than P, this rectangle represents the firms loss. Substituting P = $15 per shirt, ATC = $30 per shirt, and Q = 8,000 shirts per day into the equation for profit indicates that the firm’s loss would be $120,000: Profit = (P-ATC)xQ ($15 per shirt — $30 per shirt) x 8,000 shirts per day $15 per shirt x 8,000 shirts per day $120,000 Moura oe (re)4.2 CENGAGE | MINDTAP Practice Assignment6 Fall21 8 . Deriving the short-run supply curve Consider the competitive market for sports jackets. The followi ‘cost (AVC) curves for a typical firm in the industry. ‘COSTS (Dollars) 8 8 8 8 8 38 8BPractice Assignmenté Fall21 For each price in the following table, use the graph to determine the number of jackets this firm would produce in order to maximize its profit. Assume that when the price is exactly equal to the average variable cost, the firm is indiferent between producing zero jackets and the profit-maximizing ‘quantity. Also, indicate whether the firm will produce, shut down, or be indifferent between the two in the short run. Lastly, determine whether it will make a profit, suffer a loss, or break even at each price. Price Quantity (Dollars per jacket) (Jackets) Produce or Shut Down? Profit or Loss? 10 o v ‘Shut down v Loss v 20 Either 0 or 30,000 ¥ Either shut down or produce_¥ toss Vv 32 35,000 v Produce w Loss v 40 37,500 Produce v Loss V 50 40,000 v Produce v Break even ¥ 60 42,500 v Produce v Profit v ‘Points: Gm 1/1 Explanation: & lose Explanation ~ If a competitive firm produces a positive output, it does so by choosing to produce the quantity at which market price (P) is equal to marginal cost (MC). For example, the point on the MC curve with a height of $50 has a horizontal value of 40,000 jackets. Therefore, if the price of a $50, the firm will produce 40,000 jackets. (Note: When price equals marginal cost at more than one quantity, the profit-maximizing quantity must be the quantity where margin ‘more unit would increase profit because marginal revenue would be lar Is increasing. If m is decreasing, this means that increasing production by one In marginal cost. Therefore, production should continue until price equals marginal cost in a region where marginal cost is increasing.)#2 CENGAGE | MINDTAP Practice Assignments Fall21 A firm's decision on whether to produce in the short run depends on whether it can earn enough revenue to cover its variable costs. This is because a firm's fixed costs must be incurred in the short run, regardless of whether the firm produces output. Because these costs must be paid regardless of production, they are considered sunk and should not be taken into consideration in the short run. If the firm does not produce a positive output in the short run, economists say it shuts down. Graphically, the firm's shutdown price occurs at the price at which MC = AVC. This is because at the shutdown price, the firm must be indifferent between the profit it earns when it produces and the profit it earns if it shuts down. You can see this in the following derivation using total revenue (TR), fixed cost (FC), variable cost (VC), average variable cost (AVC), price (P), and quantity (Q): Profit if Producing = Profit if Shut Down TR - (FC + VC) = -FC TR = VC Px@ = AVCxQ P = AVC » ‘Therefore, the firm's shutdown price occurs when P = AVC. Since a competitive firm always chooses the quantity at which P = MC (if it produces), this must correspond to the intersection of the MC and AVC curves. In this case, the firm's minimum AVC Is $20 per jacket. ‘Therefore, if the market price is less than $20, the firm maximizes its profit by shutting down in the short run. If the market price is more than $20, the firm maximizes its profit by producing in the short run. If the market price Is exactly $20, the firm Is indifferent between producing and shutting down. Profit is the difference between total revenue and total cost. Breaking this down even further yields the following result: Cee aedPractice Assignmenté Fall21 Profit = TR-TC = PxQ-ATCKO = P-ATE)XO Because a competitive firm sets P = MC, this means that the firm earns a positive profit if MC > ATC, breaks even (earns zero profit) if MC = ATC, and is operating at a loss if MC < ATC. (On the following graph, use the orange points (square symbol) to plot points along the portion of the flem's short-run supply curve that corresponds to prices where there is positive output. (Note: You are given more points to plot than you need.) o ‘Your Answer 90, om v Firm's Short-Run Supply / | ga 8 8 [Dollars per jacket)Practice Assignments Fall21 On the following graph, use the orange points (square symbol) to plot points along the portion of the firm's short-run supply curve that corresponds to prices where there is positive output. (Note: You are given more points to plot than you need.) Anawer | | cont _ ¥ Finis Shor-Run Supply f | 100 % 60 7” 60 50 “0 30 2 10 ° 0 5 10 15 20 2 3 36 40 48 80 QUANTITY (Thousands of jackets)45 CENGAGE | MINDTAP \& dearer tnis course Practice Assignment6 Fall21 (On the following graph, use the orange points (square symbol) to plot points along the portion of the industry's short-run supply curve that corresponds to prices where there is positive output. (Note: You are given more points to plot than you need.) Then, place the black point (plus ‘symbol) on the graph to indicate the short-run equilibrium price and quantity in this market. Note: Dashed drop lines will automatically extend to both axes, Your Anewer Correct Answer ao 0 40 00 120 160 200 240 280 320 360 400 QUANTITY (Thousands of ackata)CENGAGE | MINDTAP % dearcrt Practice Assignment Fall21 Explanation: For prices at and above the shutdown price of $20, the industry's supply curve corresponds to the horizontal summation of all firms' marginal cost curves. For example, at $50, each firm roduce 40,000 jackets, so the industry supply at this price Is 40,000 jackets per firm x 8 firms = 320,000 jackets. ‘The short-run equilibrium price and quantity occur at the Intersection of the market demand and supply curves, which occurs at a price of $40 and a quantity of 300,000 jackets. ‘At the current short-run market price, firms will_produce __v in the short run. In the long run, some firms will exit v WK Points: mmm 1/1 Explanation: lose Explanation ~ ‘The supply and demand curves intersect at a price of $40 per jacket. This corresponds to a point on the margipal cost curve that is below each firm's average total cost curve. Therefore, in the short run, firms in this industry are able to cover their variable costs but not all of their fixed costs; thus, they suffer a loss but still produce positive output in the short run. ‘The fact that firms in this industry are earning a negative profit means that as time goes on, firms in the industry will exit in search of better opportunities in other markets, rather than continue to pay the fixed cost. This Is because fixed costs are optional in the long run, but not the short run. As firms leave the market, the market price will rise until it is at the point at which firms earn zero profit. At this point, firms in this Industry ave no Incentive to exit, and firms not in the industry will have no incentive to enter, so the industry will be in long-run equilibrium.Practice Assignment6 Fall21 9. Short-run equilibrium Consider a perfectly competitive market for wheat in Chicago. There are 110 firms in the industry, each of which has the cost curves shown on the following graph: q COST (Cents per bushel) Besos ae ee 2 6 ia— 4 ‘Ye CENGAGE | MINDTAP ractice Assignment6 Fall21 Use the orange points (square symbol) to plot the short-run industry supply curve for the wheat industry. Specifically, place an orange point at the lowest point of the supply curve and another orange point at the highest point of the supply curve. (Note: You can disregard the portion of the supply curve that corresponds to prices where there is no output, since this is the industry supply curve. Plot your points in the order In which you would like them connected. Line segments will connect the points automatically.) Then, place the black point (plus symbol) on the graph to indicate the short-run ‘equilibrium price and quantity in this market. (Note: Dashed drop lines will automatically extend to both axes.) ‘Your Anawer a PRICE (Cents per bushel) es 8 8 8 8 8B © 880 1100 1650 2200 2780 3300 3850 4400 4050 5500 QUANTITY (Thousands of bushels)2 CENGAGE | MINDTAP Practice Assignmenté Fall21 ‘Explanation: Close Explanation 1m the short run, the individual supply curve for a firm is the portion of the marginal cost curve that corresponds to prices greater than or equal to the shutdown price of 25¢ (the price at which a firm is indifferent between producing and shutting down). At prices below 25¢, firms will not Produce in the short run. At 25¢, firms will produce a total of 30,000 bushels of wheat per firm x 110 firms = 3,300,000 bushels of wheat, i ‘Therefore, (3300, 25) is the lowest point on the short-run industry supply curve. Similarly, at 85¢ per bushel, firms will produce a total of j ‘30,000 bushels of wheat per firm x 110 firms = 5,500,000 bushels of wheat. Therefore, (5500, 85) Is the highest point on the ae supply curve. ‘The short-run equilibrium price and quantity in this market occurs at the intersection of the market demand and market supply curves, which | ‘occurs at a price of 70¢ and quantity of 4,950,000 bushels of wheat in this case. | ‘Ax the current short-run market price, firms will produce _V in the short run. In the long run, __ some firms will enter M the market given the current market price. 71 a ee Explanation: Close Explanation a ‘The supply and demand curves intersect at a price of 70¢ per bushel. This corresponds to a point on the MC curve that is above each firm's ATC ‘cave. Therefore, in the short run, firms in this industry are able to cover fixed costs and variable costs and to make a positive profit. ‘The fect that firms in this industry are earning positive profit will encourage entry into the market. This entry by new firms will drive the market price down until firms eam zero profit. At this point, firms not in the industry will have no incentive to enter, and firms in this industry will have no incentive tp leave, so the industry will be in long-run equilibrium.