Section 11 – Module 60 – Perfect Competition: Reading the Graphs Mr. Weiss Section 11 – Module 60 – Perfect Competition: Reading the Graphs Refer to the graph below to answer the following questions. What is the price facing this perfect competitor? 2. What is the average revenue received by this firm? 3. Describe the demand curve facing this firm. 4. What quantity can this perfect competitor sell at the price you indicated in question #1?

Section 11 – Module 60 – Perfect Competition: Reading the Graphs Mr. Weiss Section 11 – Module 60 – Perfect Competition: Reading the Graphs Answers: 1. What is the price facing this perfect competitor? $5 2. What is the average revenue received by this firm? $5 3. Describe the demand curve facing this firm? Perfectly elastic at the market price of $5 4. What quantity can this perfect competitor sell at the price you indicated in question #1? Any quantity it wants.

Section 11 – Module 60 – Perfect Competition: Reading the Graphs Mr. Weiss Section 11 – Module 60 – Perfect Competition: Reading the Graphs 5. At what level of output does ATC reach its minimum level? 6. At what level of output does AVC reach its minimum level? 7. At what level of output would this firm choose to operate? Why? 8. At the level of output you indicated in question 7, calculate each of the following. A. Total Cost B. Total Revenue C. Profit or loss

Section 11 – Module 60 – Perfect Competition: Reading the Graphs Mr. Weiss Section 11 – Module 60 – Perfect Competition: Reading the Graphs Answers: 5. At what level of output does ATC reach its minimum level? 6 6. At what level of output does AVC reach its minimum level? 4 7. At what level of output would this firm chose to operate? Why? At 7 units of output, marginal revenue equals marginal cost and the firm is at the profit-maximizing level of output. 8. At the level of output you indicated in question 7, calculate each of the following. Total cost - $28 ($4 x 7) Total revenue - $35 ($5 x 7) Profit or loss – profit of $7 ($35 - $28)

Section 11 – Module 60 – Perfect Competition: Reading the Graphs Mr. Weiss Section 11 – Module 60 – Perfect Competition: Reading the Graphs 9. What would happen in the long run in a market in which all firms found themselves facing a $5 price? 10. If the price facing this firm fell to $3, what would be the values of each of the following at the quantity that the firm would produce? A. Total Cost B. Total Revenue C. Profit or loss   11. What would happen in the long run in a market in which all firms found themselves facing a $3 price? 12. What is the long run equilibrium price that would prevail if all firms faced similar cost conditions?

Section 11 – Module 60 – Perfect Competition: Reading the Graphs Mr. Weiss Section 11 – Module 60 – Perfect Competition: Reading the Graphs Answers: 9. What would happen in the long-run in a market in which all firms found themselves facing a $5 price? Attracted by economic profits, new firms would enter the market and drive the price down (eventually to $3.50, which is the minimum of ATC. 10. If the price facing this firm fell to $3, what would be the values of each of the following at the quantity that the firm would product? Total Cost – About $20.63 ($3.75 x 5.5) Total Revenue - $16.50 ($3.00 x 5.5) Profit or Loss – Loss of about $4.13 ($16.50 - $20.63)

Section 11 – Module 60 – Perfect Competition: Reading the Graphs Mr. Weiss Section 11 – Module 60 – Perfect Competition: Reading the Graphs Answers: 11. What would happen in the long-run in a market in which all firms found themselves facing a $3 price? Discouraged by economic losses, existing firms would exit the market and drive the price up until it reached $3.50. 12. What is the long-run equilibrium price that would prevail if all the firms faced similar cost conditions? The long-run break even price is $3.50.