MEC 103 Aishna Sharma

Perfect Competition

Problem Set

March 2023

1. A firm in a competitive market receives $500 in total revenue and has marginal revenue of $10.
What is the average revenue, and how many units were sold?

2. Assume that the cost function for a firm in a perfectly competitive market is given by C(Q )= 100
+ Q2 . If other firms in the industry sell output at a price of $10, what level of output should this
firm produce to maximize profits?

3. A market consists of 300 identical firms and the market demand curve is given by D(P)=60-P.
Each firm has a short run cost curve STC= 0.1+150q2, and all the fixed costs are sunk. The
corresponding average variable cost curve is AVC=150q. What is the short run equilibrium price
in this market?
4. Suppose that a firm has a short run total cost curve given by STC=100+20Q+Q2, where the total
fixed cost is 100.
a) What is the equation for average variable cost?
b) What is the minimum level of average variable cost?
c) What is the firm’s short run supply curve?
5. Analyze the two following situations for firms in competitive markets
a. Suppose that TC = 100 + 15q, where TC is total cost and q is the quantity
produced. What is the minimum price necessary for this firm to produce any
output in the short run?

b. Suppose that MC = 4q, where MC is marginal cost. The perfectly competitive

firm maximizes profits by producing 10 units of output. At what price does it sell
these units?

6. For a competitive firm, what is the most important thing to consider in deciding whether to shut
down in the short run?
A. Compare AVC to MR.
B. Compare TR to TC.
C. Do not produce if the TFC is not covered by revenue.
D. Produce the highest quantity demanded regardless of price.
E. Compare P to ATC.

1
7. Bob’s lawn-mowing service is a profit-maximizing, competitive firm. Bob mows lawns for $27
each. His total cost each day is $280, of which $30 is a fixed cost. He mows 10 lawns a day. What
can you say about Bob’s short-run decision regarding shutdown and his long-run decision
regarding exit?

8. If the perfectly competitive price is currently above minimum ATC, we can expect which of the
following events in the long run?
A. Price rises as firms enter the industry.
B. Market equilibrium quantity rises as firms exit the industry.
C. Nothing. The industry is currently in long-run equilibrium.
D. Profits fall as the market price rises.
E. Price falls as firms enter the industry.
Price falls as firms enter the industry. When perfectly competitive price
is above the average total cost (ATC), the firm earns economic profit.