The first two conditions imply that all consumers and firms 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 perfectly competitive market, along with the correct explanation of why or why not Scenario Perfectly Competitive? v Scholastik Inc. owns the U.S. 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. Yes, meets all assumptions ) No, no free entry v There are dozens of pasta producers that sell pasta to hundreds of Italian restaurants nationwide. The restaurant owners buy from the cheapest pasta producer available to No, not many sellers them. No, not a homogeneous product In a major metropolitan area, one chain of coffee shops has gained a large market share v because customers feel its coffee tastes better than that of its competitors. v A few major airlines account for the vast majority of air travel. Consumers view all airlines as providing basically the same service and will shop around for the lowest price. ). The demand curve facing a competitive firm fesoro is one of more than a hundred competitive firms in Denver that produce large cardboard boxes for moving. The following graph narket demand and supply curves. @ 0 T 36 + Supply 32 28 24 20 PRICE (Dollars per large box) ' 16 I i 12 I i 8 i i 4 i i o A 0o 1 2 3 4 5 & 7 8 9 10 On the following graph, use the green line (triangle symbol) to plot the demand curve for Vesoro's large cardboard boxes. @ 40 T AN % L 2 1 Demand 28 T 12+ PRICE (Dollars per large box) 0 1 2 3 4 5 6 7 8 9 10 QUANTITY (Thousands of large boxes) 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) 1 1) 1 1 The demand curve that Vesoro faces is identical to which of its other curves? Check all that apply. O Marginal revenue curve ) supply curve [J Average revenue curve [J Marginal cost curve Suppose Yvette runs a small business that manufactures shirts. Assume that the market for shirts is a perfectly competitive market, and the marke * price is $25 per shirt. Use the blue points (circle symbol) to plot total revenue and the green points (triangle symbol) to plot profit for the first seven shirts that Yvette produces, including zero shirts. @ 175 + O 150 + Total Cost Total Revenue A Profit TOTAL COST AND REVENUE (Dollars) 0 1 2 3 4 5 6 7 8 QUANTITY (Shirts) Calculate Yvette's marginal revenue and marginal cost for the first seven shirts she produces and plot them on the following graph. Use the points (circle symbol) to plot marginal revenue and the orange points (square symbol) to plot marginal cost. Note: Be sure to plot marginal values between whole unit values; for example if the marginal revenue of the second shirt is v, plot a point a Line segments will connect automatically. @ 0 7 o LI Marginal Revenue 30 1 O % Marginal Cost (Dollars per shirt) COSTS AND REVENL 0 t t t t t t t { 0 1 2 3 4 5 B 7 3 QUANTITY (Shirts) Yvette's profit is maximized when she produces E shirts. When she does this, the marginal cost of the last shirt she produces is s which is W than the price Yvette receives for each shirt she sells. The marginal cost of producing an additional shirt (that is, one more shir than would maximize her profit) is , which is W than the price Yvette receives for each shirt she sells. Therefore, Yvette's profit- maximizing quantity corresponds to the intersection of the W curves. Because Yvette is a price taker, this last condition can also be written as W Profit maximization in the cost-curve diagram ppose that the market for dress shirts is a perfectly competitive market. The following graph shows the daily rket. 50 45 Profit or Loss 40 35 30 AC 25 20 15 10 AVC MC 5 0 2 4 6 8 10 12 14 16 18 20 QUANTITY (Thousands of shirts)In the short run, at a market price of $15 per shirt, this firm will choose to produce " shirts 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 15 and the firm chooses to produce the quantity you already selected. The area of this rectangle indicates that the firm's would be per day. (Hint: Be sure to take note of the units used on the vertical and horizontal axes.) Consider the perfectly competitive market for dress shirts. The following graph shows the marginal cost (MC), average cost (AC), and average variable cost (AV() curves for a typical firm in the industry. COSTS (Dollars) QUANTITY (Thousands of shirts) For each price in the following table, use the graph to determine the number of shirts 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 shirts 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 shirt) (Shirts) Produce or Shut Down? Profit or Loss? 10 v hd v 20 v v v 32 v hd v 40 v v v 50 v hd v 60 v v v On 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. 100 90 Firm's Short-Run Supply 80 70 60 50 PRICE (Dollars per shirt) 40 30 20 10 0 5 10 15 20 25 30 35 40 45 50 QUANTITY (Thousands of shirts) 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. Do not plot the extra points) Then, place the black point (plus symbol) an 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 1 ~0- 90 a0 Industry's Short-Run Supply 70 "+ &0 Equilibrium 50 40 PRICE {Dallars per shirt) 30 20 0 + + + + + + + b b b i 0 40 80 120 160 200 240 280 320 360 400 QUANTITY (Thousands of shirts) At the current short-run market price, firms will W in the short run. In the long run, Consider a perfectly competitive market for wheat in San Francisco. There are 60 firms in the industry, each of which has the cost curves shown on the following graph: Ise the black point (plus symbol) to view the coordinates of the points on the AVC, AC, and MC curves. to this graph. 100 90 -+ MC 80 70 60 AC 50 40 30 20 AVC 10 5 10 25 30 35 40 45 50 OUTPUT (Thousands of bushels)The following graph shows the market demand for wheat. Use the orange points (square symbol) to plot the short-run industry supply curve for the wheat industry. Specifically, place an orange point at the lowest point of the supply curve and another orange point at the highest point of the supply curve. (Note: 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. Plot your points in the order in which you would like them connected. Line segments will connect the points automatically.) Then, place the black point (plus symbol) on the graph to indicate the short-rur equilibrium price and quantity in this market. 100 + Demand == 90 + a0 1 Supply Curve 70 + "!' B0 + Equilibrium 50 + 0 + 0+ PRICE {Cents per bushel) 20 + 0 } } } } } } } } } { 0 300 600 900 1200 1500 1800 2100 2400 2700 3000 QUANTITY (Thousands of bushels) At the current short-run market price, firms will W in the short run. In the long run, m' given the current market price. Consider the perfectly competitive market for copper. Assume that, regardless of how many firms are in the industry, every firm in the industry is identical and faces the marginal cost (M(C), average cost (AC), and average variable cost (AVC) curves shown on the following graph. @ COSTS (Dollars per pound) QUANTITY (Thousands of pounds) The following diagram shows the market demand for copper. 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 to purple points (diamond symbol) to plot the short-run industry supply curve when there are 15 firms. Finally, use the green points (triangle symbo plot the short-run industry supply curve when there are 20 firms.100 + 'o 90 + 80 L Supply (10 firms) = 70 - c 3 2 60 Supply (15 firms) 3 w 5 50 A S a0 Supply (20 firms) H Demand 30 + 20 + 10 + 0 0 123 250 373 500 /23 750 873 1000 1123 1250 QUANTITY (Thousands of pounds) If there were 10 firms in this market, the short-run equilibrium price of copper would be per pound. At that price, firms in this industry would W . Therefore, in the long run, firms would W the copper market. Because you know that the perfectly competitive firms earn W economic profit in the long run, you know the long-run equilibrium pr must be per pound. From the graph, you can see that this means there will be " firms operating in the copper industry in long-run equilibrium. True or False: Each of the firms operating in this industry in the long run earns negative accounting profit. O True O False Suppose you two factories that produce widgets. f itably located hear a firm that sells raw materials viagets, whereas Factory 1 is in a more remote location and thus has higher transportation costs. Assume zero fixed costs for both factories. The following graph illustrates the marginal cost (MC) for producing widgets in each of these factories. 24 22 20 TC (Factory 1) MC (Factory 1) 18 16 TC (Factory 2) MC (Factory 2) COST (Dollars) 12 Co 0 2 4 6 8 10 12 14 16 18 20 22 24 QUANTITY (Thousands)You need to produce 24,000 widgets, and you have three options to allocate your production. Option I. Produce all 24,000 widgets in Factory 2, which is more efficient than Factory 1. Option II. Produce 12,000 widgets each in Factory 1 and Factory 2. Option III. Allocate production of 24,000 widgets such that the marginal costs are equalized between the two factories. Calculate the total cost (TC) of production under each of the options, and enter them in the following table. Hint: The area under the MC curve gives you the total cost. To determine total costs, you can either calculate the area yourself or use the green points (triangle symbols) or the purple points (diamond symbols) on the graph to shade the area representing total costs for each. After you place triangle in the appropriate region on the graph, you can select the triangle to get its area. You will not be graded on where you place the triangles. TC (Factory 1) TC (Factory 2) TC (Factory 1 + Factory 2) Option (Thousands of dollars) (Thousands of dollars) (Thousands of dollars) Option II 72 36 108 Option I 0 Option III 32 Which option minimizes the total cost of production? Option I L O option II O option