Managerial Economics AC 4102

Pure Competitive Market

Problem Set

A. The market for leche flan in the city of Panderia is competitive and has the following demand schedule
Price Quantity Demanded
50 1,200
100 1,100
150 1,000
200 900
250 800
300 700
350 600
400 500
450 400
500 300
550 200
600 100
650 0

Each producer in the market has fixed costs of Php 450 and the marginal cost schedule:

Quantity Marginal Cost

1 Php 100
2 200
3 300
4 400
5 500
6 600

a. Compute each producer's total cost and average total cost for each quantity from 1 to 6 leche
flan.
b. The price of leche flan is now at 11. How many leche flans are sold? How many leche flan does
each producer make?
c. Is the situation described in part (b) a long run equilibrium? Why or Why not?
d. Suppose that in the long run there is free entry and exit. How much profit does each producer
earn in the long run equilibrium? What is the market price? How many leche flan does each
producer make? How many leche flan are sold in the market? How many leche flan producers are
operating?

B. Lingin Liggid Inc., faces costs of production as follows:

Quantity ( cases ) Total Fixed Cost Total Variable Cost

0 5000 0
1 5000 2500
2 5000 3500
3 5000 4500
4 5000 7000
 5 5000 10000
6 5000 18000

a. Calculate the company’s average fixed cost, average variable cost, average total cost, and
marginal cost at each level of production.
b. The price of a case of ball bearings is Php 2500. Seeing that he can’t make a profit, the chief
executive officer (CEO) decides to shut down operations. What is the firm’s profit/loss? Is shutting down
a wise decision? Explain.
c. Vaguely remembering his introductory economics course, the chief financial officer tells the
CEO it is better to produce 1 case of ball bearings because marginal revenue equals marginal cost at that
quantity. What is the firm’s profit/loss at that level of production? Is producing 1 case the best decision?
Explain.