1. Ch 14 Problems and Applications 1-6:
#1. What are the characteristics of a competitive market?
Many buyers/sellers
Each has negligible impact
Price taker
Identical (same) goods
Free entry/exit
= access to info./technology
Which of the following drinks do you think is best described by these characteristics? Tap water bottled water cola beer
Tap water bottled water cola beer ……..why?
Why aren’t the others?
Tap water is a natural monopoly
Cola and beer have wide variety – so the goods are not all the same

2. 2. Sold 200 doses and faces following ATCQ
ATC
199
200
201
ATC x Q = TC MC
39601
40000
399
40401
401
If a new customer offers to pay her $300 for one dose, should she make one more? Explain
Need to know if MC is > or < $300….
So need to know TC …..
Since the MC of making one more dose is $401 and the MR is $300, then she should not make it

3. A. What is the MC of a string? If profit maximizing where MR = MC
3. Licorice industry is competitive. Each firm produces 2million strings/year. ATC of $0.20 and Price of $0.30
A. What is the MC of a string?
If profit maximizing where MR = MC
…….since MR = P……..then P=MC…..
So the MC of a string is $0.30
B. Is this industry in long run equilibrium? Why or Why not?
No …
In LRE, P = MC = ATC and here the P (.30) > ATC (.20)

4. 0.30
0.20

5. Once you have ordered it, it is a sunk cost
#4. Order $40 Lobster dinner. You eat ½ of it and are now full. She says “finish it, cant take it home and already paid for it” What should you do?
Once you have ordered it, it is a sunk cost
So now it does not represent an opportunity cost
The cost of your dinner should not influence your decision to eat it or not

6. #5. Bob’s lawn mowing is profit max.
TC each day = $280 ($30 is fixed)
Q = 10 lawns/day
Short run shut down decision?
TR < VC?
TR = 270 > VC 250
Or P< AVC ?
P = 27 > AVC = VC/Q 250/10 = 25
So….don’t shut down

7. Long Run Exit decision?
TR < TC?
TR = 270 < TC = 280 Or
P < ATC?
P = 27 < ATC = TC/Q 280/10 = 28
So……he should exit in long run

8. #6 Q TC TR
Profit MR MC 8 1 9 2 10 16 3 11 24 4 13 32 5 19 40 6 27 48 7 37 56

9. Q TC TR
Profit MR MC 8 -8 1 9 -1 2 10 16 6 3 11 24 13 4 32 19 5 40 21 27 48 7 37 56
a. Calculate profit
TR-TC
How much should the firm produce to max profit?

10. Q TC TR
Profit MR MC 8 -8 1 9 -1 2 10 16 6 3 11 24 13 4 32 19 5 40 21 27 48 7 37 56
B. Calculate MR and MC
Graph them

11. At what Q do these curves cross
At what Q do these curves cross? How does this relate to answer in A about max profit?
Cross between 5, 6 units and this is same as table in A

12. C. Can you tell whether this firm is in a competitive industry?
Yes it is competitive because MR = P at each Q
are they in long run equilibrium?
No , not in LRE because they have positive economic profits at profit max point MR= MC ($21 at Q 5 and Q6) :
LRE = zero economic profits