Perfect Competition Practice FRQ



THANKSGIVING BREAK WORK (MICROECONOMICS)

Complete ALL of the following Questions. Be careful to clearly explain your reasoning and to provide clear labels to all graph axes and curves.

1. Tuna and Salmon are substitutes in perfectly competitive markets that are experiencing long-run equilibrium.

A. Suppose that an unforeseen change in the weather patterns of the Pacific Ocean dramatically reduces the salmon population while leaving the tuna populations unaffected. In a correctly labeled graph, show how this weather pattern initially affects:

i. Equilibrium price and quantity in the market for salmon.

B. Charlie owns a perfectly competitive tuna fishing boat. Explain how changes in the market for salmon affect each of the following:

i. Price of tuna in the market.

ii. Quantity of tuna produced in the market.

iii. Quantity of tuna produced by Charlie's firm.

iv. Economic profit or loss for Charlie's firm.

C. Describe how the situation in the tuna market described in part (B) adjusts in the long run. Be sure to predict how the following changes in the long run:

i. Price of tuna in the market.

ii. Quantity of tuna produced in the market.

iii. Quantity of tuna produced by Charlie's firm.

iv. Economic profit or loss for Charlie's firm.

2.

Assume that in a perfectly competitive industry with equilibrium price of $25, a firm has the following characteristics:

Marginal Cost = Average Variable Cost at $20

Marginal Cost = Average Total Cost at $30

Output = 100 Units

a. Draw a graph for the industry and the firm

i. Label AVC, ATC, MC, and MR

ii. Label Short-run supply curve

iii. Label shut down price

iv. Approximately how much is the total profit or loss? How do you know?

b. With a new set of graphs, explain what you would expect to happen to this industry in the long-run.

i. Explain what happens to price, quantity, and profit/loss for the firm in the long-run.

ii. Explain what happens to price and quantity for the industry in the long-run.

3.

Complete the following chart for a perfectly competitive firm selling its product at a price of $30, and then answer the questions:

|Output |Total Revenue |Marginal Revenue |Variable Cost |Fixed Cost |Total Cost |Marginal Cost |

|0 |0 |- |0 | |10 |- |

|1 | | |30 | | | |

|2 | | |50 | | | |

|3 | | |60 | | | |

|4 | | |70 | | | |

|5 | | |85 | | | |

|6 | | |105 | | | |

|7 | | |130 | | | |

|8 | | |170 | | | |

a. What is the AVC when producing five units out output?

b. To maximize profits or minimize losses, what output should this firm produce? Explain how you got your answer?

c. Using your answer from (b), what is the profit or loss per unit at the profit maximizing output?

|Unit 3: Costs of Production and Perfect Competition |

|Production and the Law of Diminishing Marginal Returns* |

|Calculate MP. Plot TP and MP on Graph |Output |

|Number of | |

|Workers |20 |

|Total | |

|Product | |

|Marginal |15 |

|Product | |

| | |

|0 |10 |

|0 | |

| | |

| |5 |

|1 | |

|5 | |

| | |

| |0 1 2 3 4 5 6 Workers |

|2 | |

|15 |Identify the three stages of returns: increasing, decreasing, and negative marginal |

| |returns |

| | |

|3 | |

|19 | |

| | |

| | |

|4 | |

|20 | |

| | |

| | |

|5 | |

|20 | |

| | |

| | |

|6 | |

|18 | |

| | |

| | |

|Define the Law of Diminishing Marginal Returns | |

| | |

| | |

| | |

| | |

| | |

|After which worker does diminishing marginal returns set in? | |

|Revenue and Costs* (Define the following) |

|Total Revenue- |Fixed Cost (FC)- |

| | |

|Accounting Profit- |Variable Cost (VC)- |

| | |

|Economic Profit- |Total Cost (TC)- |

| | |

|Normal Profit- |Marginal Cost (MC)- |

|Short Run Cost Curves* (at least one fixed resource) |Long-Run Cost Curves (all resources are variable) |

|Draw and Label ATC, AVC, and MC |Costs |

|Costs | |

| | |

| | |

| | |

| | |

| | |

| |Output |

| |Economies of Scale- |

| | |

| | |

| |Diseconomies of Scale- |

| | |

|Output | |

|Calculating ATC, AVC, AFC, and MC |

|Fill in the blanks for a firm producing boxes of oranges : |Assume this firm is in a perfectly competitive market and |

|Output |the price is $35 for each box. |

|(box) | |

|Variable |1. How many boxes should they produce? Why? |

|Cost | |

|Total | |

|Cost |2. Calculate the profit at that quantity |

|AVC | |

|AFC | |

|ATC | |

|MC | |

| | |

|0 | |

|$0 | |

|$10 | |

|- | |

|- | |

|- | |

|- | |

| | |

|1 | |

|20 | |

| | |

| | |

| | |

| | |

| | |

| | |

|2 | |

|30 | |

| | |

| | |

| | |

| | |

| | |

| | |

|3 | |

|60 | |

| | |

| | |

|3.33 | |

|23.3 | |

| | |

| | |

|4 | |

|100 | |

| | |

| | |

|2.5 | |

|27.5 | |

| | |

| | |

|Shut Down Point* |Per-Unit vs. Lump-Sum* |

|Shut Down Rule: |1. A per unit tax shifts __________________ so quantity will |

| |________________________. |

| | |

|Short-Run Supply Curve: |2. A lump sum tax shifts ________________ so quantity will |

| |________________________. |

|Graphing Perfect Competition* |

|Draw side-by-side graphs showing a perfectly competitive market and firm. Draw the firm making short-run profit |List (in order) what will happen |

| |in the long-run |

| | |

| | |

| | |

| | |

| | |

| |Market |

| |P___ Q___ |

| |Firm |

| |P___ Q___ |

| | |

| | |

|Perfectly Competitive Firm Making a Loss |Perfectly Competitive Firm in Long-Run* |

|Price | Price |

| | |

| | |

| | |

| | |

| | |

| | |

| |Quantity |

| |This firm has both type of efficiency: |

| |1. |

|Quantity |2. |

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