1. Characteristics of competitive markets The model of competitive markets relies on these three core assumptions: 1. There must be many buyers and sellers-a few players can't dominate the market. 2. Firms must produce an identical product-buyers must regard all sellers' products as equivalent. 3. Firms and resources must be fully mobile, allowing for free entry into and exit from the industry. The first two conditions imply that all consumers and firms are price takers. While the third is not necessary for price-taking behaviour, assume for thi 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, along with the correct explanation of why or why not. Scenario Competitive? No, not many sellers In a small town, there are two providers of broadband Internet access: the cable company and the phone company. The Internet access offered by both providers is of the same speed. No, no free entry Scholastic Inc. owns the Canadian copyright to a popular book series. It is the only company with the legal right to publish books in the series in Canada. Yes, meets all assumptions Dozens of companies produce plain white socks. Consumers regard plain white socks as identical and don't care who manufactures their socks. No, not an identical product 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.Suppose that Talero is one of more than a hundred competitive firms in Mississauga that produces cardboard boxes. In other words, it faces a perfectly elastic (horizontal) demand curve for its output at the current market price (in this case, $5 per small box). It is important to note that while the demand curve of a competitive firm is perfectly elastic, the market demand curve of a competitive market, still obeys the law of demand and is downward sloping. In a competitive market, many firms sell an identical product to many buyers. Therefore, if Talero charges even slightly more for a box than other firms charge, it will lose all its customers because every other firm in the industry is offering a lower price. In other words, one of Talero's boxes is a perfect substitute for boxes from the factory next door or from any other factory. On the other hand, if Talero charges less than what other firms charge, Talero would also be worse off because the quantity sold would remain the same since the firm can already sell as much output as it wants at the market price, but the revenue from each unit sold would be lower. Thus, as a competitive firm, Talero must accept the price of $5 per small box as given. In other words, it faces a perfectly elastic (horizontal) demand curve for its output at the current market price (in this case, $5 per small box). The green line on the following graph illustrates the demand curve for Talero's small cardboard boxes: 10 co PRICE (Dollars per small box) 2 3 5 6 7 9 10 QUANTITY (Thousands of small boxes)Fill in the price and the total, marginal, and average revenue Talero earns when it produces zero, one, two, or three boxes each day. Quantity Price Total Revenue Marginal Revenue Average Revenue (Boxes) (Dollars per box) (Dollars) (Dollars) (Dollars per box) 0 5 0 5 1 5 5 5 5 2 10 5 5 3 5 15 5 The demand curve that Talero faces is identical to which of its other curves? Check all that apply. O Supply curve Marginal cost curve Average revenue curve Marginal revenue curveSuppose Yakov runs a small business that manufactures frying pans. Assume that the market for frying pans is a competitive market, and the market price is $20 per frying pan. The following graph shows Yakov's total cost curve. On the graph below, use the blue points (circle symbol) to plot total revenue and the green points (triangle symbol) to plot profit for the first seven frying pans that Yakov produces, including zero frying pans. 200 O 175 Total Revenue 150 A 125 Total Cost Profit 100 TOTAL COST AND REVENUE (Dollars) 75 50 25 0 .25 1 2 3 5 6 7 8 QUANTITY (Frying pans)Calculate Yakov's marginal revenue and marginal cost for the first seven frying pans he produces, and plot them on the following graph. Use the blue points (circle symbol) to plot marginal revenue and the orange points (square symbol) to plot marginal cost. 40 O Marginal Revenue 30 25 Marginal Cost COSTS AND REVENUE (Dollars per frying pan) 15 10 9 2 8 7 QUANTITY (Frying pans) Yakov's profit is maximized when he produces frying pans. When he does this, the marginal cost of the last frying pan he produces is , which is than the price Yakov receives for each frying pan he sells. The marginal cost of producing an additional frying pan (that is, one more frying pan over the amount that would maximize his profit) is |$ , which is than the price Yakov receives for each frying pan he sells. Therefore, Yakov's profit-maximizing quantity corresponds to the intersection of the curves. Because Yakov is a price taker, this last condition can also be written asSuppose that the market for wind chimes is a competitive market. The following graph shows the daily cost curves of a firm operating in this market. 40 36 Profit or Loss 32 24 PRICE (Dollars per wind chime) ATC 16 12 AVC Co MC 2 6 8 10 12 14 16 18 20 QUANTITY (Thousands of wind chimes) In the short run, at a market price of $20 per wind chime, this firm will choose to produce wind chimes per day. On the previous graph, use the blue rectangle (circle symbols) to shade the area representing the firm's profit or loss if the market price is $20 and the firm chooses to produce the quantity you already selected. Note: In the following question, you should enter a positive number in the numeric entry field. The area of this rectangle indicates that the firm's would be $ per day.Suppose that the market for cashmere sweaters is a competitive market. The following graph shows the daily cost curves of a firm operating in this market. (?) 100 90 PRICE (Dollars per sweater) 10 20 90 100 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 previous 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 previous 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) 25.00 520,000 40.00 520,000 65.00 520,000 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 $520,000 per day. In other words, if it shuts down, the firm would suffer losses of $520,000 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 per sweater.Consider the competitive market for sports jackets. 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 90 80 ATC 8 8 COSTS ( Dollars) B O MCO 10 20 30 40 50 70 80 90 100 QUANTITY (Thousands of jackets) For each price in the following table, use the graph to determine the number of jackets 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 jackets 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 jacket) (Jackets) Produce or Shut Down? Profit or Loss? 15 20 25 55 70 85On 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 -O 90 Firm's Short-Run Supply 80 70 60 50 PRICE (Dollars per jacket) 40 30 20 10 20 30 40 50 60 70 06 100 QUANTITY (Thousands of jackets)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 Industry's Short-Run Supply 80 Demand 70 60 Equilibrium 51 PRICE (Dollars per jacket) 30 20 80 160 240 320 400 480 560 640 720 800 QUANTITY (Thousands of jackets) At the current short-run market price, firms will in the short run. In the long run,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 90 80 70 60 50 COSTS (Dollars per tonne) 40 ATC 30 20 MC O AVC 10 20 30 40 50 60 70 90 100 QUANTITY (Thousands of tonnes)The following diagram shows the market demand for steel. On the graph below, 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 90 80 Supply (10 firms) 70 Supply (15 firms) PRICE (Dollars per tonne) Supply (20 firms) Demand 20 125 250 375 500 625 750 875 1000 1125 1250 QUANTITY (Thousands of tonnes) If there were 10 firms in this market, the short-run equilibrium price of steel would be |$ per tonne. At that price, firms in this industry would . Therefore, in the long run, firms would the steel market. Because you know that competitive firms earn economic profit in the long run, you know the long-run equilibrium price must be S per tonne. From the graph, you can see that this means there will be * 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 FalseSuppose that the turkey industry is in long-run equilibrium at a price of $5 per kilogram of turkey and a quantity of 300 million kilograms per year. Suppose the Public Health Agency of Canada (PHAC) issues a report saying that eating turkey is bad for your health. The PHAC's report will cause consumers to demand / turkey at every price. In the short run, firms will respond by On the graph below, shift the demand curve, the supply curve, or both on the following diagram to illustrate these short-run effects of the PHAC's report. 10 Supply Demand Supply PRICE (Dollars per kilogram) Demand N 120 180 240 300 360 420 480 540 600 QUANTITY (Millions of kilograms) In the long run, some firms will respond by untilOn the graph below, shift the demand curve, the supply curve, or both on the following diagram to illustrate both the short-run effects of the PHAC's report and the new long-run equilibrium after firms and consumers finish adjusting to the news. O 9 Supply Demand 7 Supply 5 PRICE (Dollars per kilogram) Demand 60 180 240 300 360 420 480 540 600 QUANTITY (Millions of kilograms) The new equilibrium price and quantity suggest that the shape of the long-run supply curve in this industry is in the long run