Módulo 3.

Organización Industrial
Workbook 1. Competition

1. Consider the following cost structure of a firms operating in a short run purely competitive
environment, where q represents the output level: TC(q) = 60 +40 q – 2 q2 + q3.
1.1 Write the equations of the average variable cost (AVC) and the marginal cost (SMC) functions 1.2.
Find the minimum market price that the firm could face producing a positive output (Hint. The shutdown
price).
1.3 Find the equation of the individual supply function.
1.4 Determine the production plans (total cost, total revenue and profit level) that maximize profit for the
given market prices and cost structures. Provide your answers in Table 1.

Table 1
Market price (p) Output (q) Total cost Total revenue Profit
$30
$45
$50
$100

2. A perfectly competitive industry has a large number of potential entrants. Each firm has an identical
cost structure such that long – run average cost is minimized at an output of 10 units (qi = 10). The
minimum average cost is $100 per unit. Total market demand is given by: Q = 3,000 – 5 p.
2.1 If the industry is a constant cost industry, provide the industry’s long – run supply function
2.2 Find the long – run equilibrium price, the total industry output, the output of each firm, the number of
firms in the industry, and the profits of each firm.
2.3The short – run total cost associated with each firm´s long run equilibrium output is given by
C(q) = 500 + 5 q2. Find the output level at which the short-run average cost reach a minimum.
2.4 Calculate the short-run supply function for each firm and the industry short-run supply function
2.5 Suppose now that the market demand function shifts upward to Q = 4,000-5 p. Using this new
demand curve, find the very short – run price and industry output.
2.6 Using the new demand, use the industry short-run supply function to find the price and total industry
output.
2.7 Find the new long – run equilibrium for the industry. That is, provide the price, total industry output,
output of each firm, the number of firms in the industry, and the profits of each firm.
Solutions
1.1 AVC= 40 – 2q + q2, SMC= 40 – 4q + 3 q2
1.2 Shutdown price $39
4+√16−12 (40−𝑝)
1.3 Supply function 𝑞 = 6
, 𝑝 ≥ $39
1.4
Market price (p) Output (q) Total Cost Total Revenue Profit
$ 30 0 60 0 - 60
$ 45 2.12 145.32 95.38 - 49.94
$ 50 2.61 168.57 130.52 -38.47
$ 100 5.19 353.35 518.82 165.47

1.5 q = 8.8

2.1 p = $100
2.2 p = $100, Q0 = 2500, q = 10, (the number of firms) n0 = 250, (profit) π = 0.
2.3 Setting ATC = SMC, q = 10
2.4 The short-run supply function for each firm is q = p / 10, and the industry short-run supply function is
Qs = (n) q = 250 p / 10 = 25 p
2.5 pvsr = 300
2.6 psr = 133.33, Q = 3,333.33

2.7 p = $100, Q1 = 3500, q = 10, n1 = 350,  = 0.