1. Characteristia of competitive markets The model of competitive markets relies on these three core assumptions: 1. There must be many buyers and sellersa few players can't dominate the market. 2. Firms must produce an identical productbuyers must regard all sellers' products as equivalent. 3. Firms and resources must be fully mobile, allowing free entry into and exit from the industry. The rst two conditions imply that all consumers and rms are price takers. While the third is not necessary for price-taking behavior, assume for this problem that a market cannot maintain competition in the long run without free entry. Identify whether or not each of the following scenarios describes a competitive market, aiong with the correct expianation of why or why not. Scenario Competitive? No, not many sellers '7 In a small town, there are two providers of broadband Internet access: a cable company and the phone company. The Internet access offered by both providers is of the same speed. No, no free ent V Scholastik Inc. owns the U5. copyright to a popular book series. It is the only company with the legal right to publish books in the series in the United States. No, not an identical product 'I" In a major metropolitan area, one chain of coffee shops has gained a large market share because customers feel its coffee tastes better than that of its competitors. Yes, meets all assumptions V Dozens of companies produce plain white socks. Consumers regard plain white socks as identical and don't care who manufactures their socks. 2. The demand curve facing a competitive firm The following graph shows the daily market for small cardboard boxes in Chicago. (? 10 Demand Supply Co 5 , 5 PRICE (Dollars per small box) N 2 3 4 5 6 9 10 QUANTITY (Millions of small boxes) Suppose that Vesoro is one of more than a hundred competitive firms in Chicago that produce such cardboard boxes. Based on the preceding graph showing the daily market demand and supply curves, the price Vesoro must take as given is |$ Fill in the price and the total, marginal, and average revenue Vesoro earns when it produces 0, 1, 2, or 3 boxes each day. Quantity Price Total Revenue Marginal Revenue Average Revenue Boxes (Dollars per box) (Dollars) (Dollars) (Dollars per box) 0 W N H The demand curve that Vesoro faces is identical to which of its other curves? Check all that apply. Marginal revenue curve Supply curve Marginal cost curve Average revenue curve3. Profit maximization using total cost and total revenue curves Suppose Musashi runs a small business that manufactures frying pans. Assume that the market for frying pans is a competitive market, and the market price is $20 per frying pan. The following graph shows Musashi's total cost curve. Use the blue points (circle symbol) to plot total revenue and the green points (triangle symbol) to plot profit for frying pans quantities zero through seven (inclusive) that Musashi produces. ? 200 175 Total Revenue 150 Total Cost 125 Profi 100 TOTAL COST AND REVENUE (Dollars o 25 QUANTITY ( Frying pans ) Calculate Musashi's marginal revenue and marginal cost for the first seven frying pans he produces, and plot them on the following graph. Use the blue points (circle symbol) to plot marginal revenue and the orange points (square symbol) to plot marginal cost at each quantity. ? 10 O 35 Marginal Revenue 30 Marginal Cost COSTS AND REVENUE (Dollars per frying pan) 0Calculate Musashi's marginal revenue and marginal cost for the first seven frying pans he produces, and plot them on the following graph. Use the blue points (circle symbol) to plot marginal revenue and the orange points (square symbol) to plot marginal cost at each quantity. 40 35 Marginal Revenue 30 25 Marginal Cost COSTS AND REVENUE (Dollars per frying pan) 20 15 10 5 2 5 6 7 QUANTITY (Frying pans) Musashi's profit is maximized when he produces frying pans. When he does this, the marginal cost of the last frying pan he produces is $ , which is greater than the price Musashi receives for each frying pan he sells. The marginal cost of producing an additional frying pan (that is, one more frying pan than would maximize his profit) is |$ , which is less than the price Musashi receives for each frying pan he sells. Therefore, Musashi's profit-maximizing quantity corresponds to the intersection of the curves. Because Musashi is a price taker, this last condition can also be written as P = MC Grade It Now Save & Continue5. Profit maximization and shutting down in the short run Suppose that the market for black sweaters is a competitive market. The following graph shows the daily cost curves of a firm operating in this market. (?) 30 ATC PRICE (Dollars per sweater) AVC MC 0 6 8 10 12 14 16 18 20 QUANTITY (Thousands of sweaters) For each price in the following table, calculate the firm's optimal quantity of units to produce, and determine the profit or loss if it produces at that quantity, using the data from the graph to identify its total variable cost. Assume that if the firm is indifferent between producing and shutting down, it will produce. (Hint: You can select the purple points [diamond symbols] on the graph to see precise information on average variable cost.) Price Quantity Total Revenue Fixed Cost Variable Cost Profit ( Dollars per sweater) (Sweaters) (Dollars) ( Dollars) (Dollars) (Dollars) 12.50 7,500 93,750 135,000 87,500 -135,000 27.50 10,000 275,000 135,000 140,000 45.00 12,000 540,000 135,000 210,000 195,000 If the firm shuts down, it must incur its fixed costs (FC) in the short run. In this case, the firm's fixed cost is $135,000 per day. In other words, if it shuts down, the firm would suffer losses of $135,000 per day until its fixed costs end (such as the expiration of a building lease). This firm's shutdown price-that is, the price below which it is optimal for the firm to shut down-is $12.50 * per sweater.6. Deriving the short-run supply curve Consider the competitive market for halogen lamps. The following graph shows the marginal cost (MC), average total cost (ATC), and average variable cost (AVC) curves for a typical firm in the industry. (?) 100 8 8 8 ATC COSTS (Dollars) 30 0 AVC MCO 10 20 30 40 50 60 70 80 90 100 QUANTITY (Thousands of lamps) For each price in the following table, use the graph to determine the number of lamps this firm would produce in order to maximize its profit. Assume that when the price is exactly equal to the average variable cost, the firm is indifferent between producing zero lamps and the profit-maximizing quantity. Also, indicate whether the firm will produce, shut down, or be indifferent between the two in the short run. Lastly, determine whether it will make a profit, suffer a loss, or break even at each price. Price Quantity (Dollars per lamp) (Lamps) Produce or Shut Down? Profit or Loss? 15 30,000 Shut down Loss 20 40,000 Either shut down or produce Loss 25 45,000 Produce Loss 55 60,000 Produce Loss 70 65,000 Produce Break even 85 70,000 Produce ProfitOn the following graph, use the orange points (square symbol) to plot points along the portion of the firm's short-run supply curve that corresponds to prices where there is positive output. (Note: You are given more points to plot than you need.) ?) 100 8 Firm's Short-Run Supply g PRICE (Dollars per lamp) 20 10 20 30 40 50 60 70 80 90 100 QUANTITY (Thousands of lamps) Suppose there are 8 firms in this industry, each of which has the cost curves previously shown. On the following graph, use the orange points (square symbol) to plot points along the portion of the industry's short-run supply curve that corresponds to prices where there is positive output. (Note: You are given more points to plot than you need. ) Then, place the black point (plus symbol) on the graph to indicate the short-run equilibrium price and quantity in this market. Note: Dashed drop lines will automatically extend to both axes. (?) 100 -0- 90 80 Demand Industry's Short-Run Supply Equilibrium 8 PRICE (Dollars per lamp) 50 20 firms will neither enter nor exit 80 160 240 320 400 480 560 640 720 800 QUANTITY (Thousands of lamps) some firms will enter some firms will exit At the current short-run market price, firms will produce * in the short run. In the long run,7. Short-run supply and long-run equilibrium Consider the competitive market for steel. Assume that, regardless of how many firms are in the industry, every firm in the industry is identical and faces the marginal cost (MC), average total cost (ATC), and average variable cost (AVC) curves shown on the following graph. 100 8 COSTS (Dollars per ton) ATC MC O AVC 10 20 0 40 50 60 70 80 90 100 QUANTITY (Thousands of tons) The following diagram shows the market demand for steel. Use the orange points (square symbol) to plot the initial short-run industry supply curve when there are 10 firms in the market. (Hint: You can disregard the portion of the supply curve that corresponds to prices where there is no output since this is the industry supply curve.) Next, use the purple points (diamond symbol) to plot the short-run industry supply curve when there are 15 firms. Finally, use the green points (triangle symbol) to plot the short-run industry supply curve when there are 20 firms. 100 8 Supply (10 firms) 8 8 8 8 Supply (15 firms) (Dollars per ton)20 AVC 10 MC O 10 20 0 40 50 60 70 80 90 100 QUANTITY (Thousands of tons) The following diagram shows the market demand for steel. Use the orange points (square symbol) to plot the initial short-run industry supply curve when there are 10 firms in the market. (Hint: You can disregard the portion of the supply curve that corresponds to prices where there is no output since this is the industry supply curve.) Next, use the purple points (diamond symbol) to plot the short-run industry supply curve when there are 15 firms. Finally, use the green points (triangle symbol) to plot the short-run industry supply curve when there are 20 firms. (? 100 Supply (10 firms) 8 8 8 8 8 8 8 Supply (15 firms) PRICE (Dollars per ton) Supply (20 firms) Demand 125 250 375 500 625 750 875 1000 1125 1250 QUANTITY (Thousands of tons) If there were 10 firms in this market, the short-run equilibrium price of steel would be $40 per ton. At that price, firms in this industry would earn a positive profit . . Therefore, in the long run, firms would enter the steel market. Because you know that competitive firms earn _zero economic profit in the long run, you know the long-run equilibrium price must be $30 per ton. From the graph, you can see that this means there will be 15 _ firms operating in the steel industry in long-run equilibrium. True or False: Assuming implicit costs are positive, each of the firms operating in this industry in the long run earns negative accounting profit. True O False