Perfect Competition

1. Prices and Markets. Perfect Competition – Revision. Topic 7 1
Perfect Competition
Review Questions
1. Use the figure below, representing a perfectly competitive firm, to complete the following statements.
(a) If price is $7, the firm should produce __________ units.
(b) Since average total cost of this profit maximising output is $ __________ total cost is $
__________ .
(c) Therefore the firm makes a total profit of $ __________ .
(d) Price then falls to $3. The firm will produce approximately
__________ units.
(e) Since average total cost at this output is $ __________ , total revenue less total cost is $
__________ .
(f) Total variable cost is $ __________ ; thus the firm’s total revenue covers all variable cost, leaving
approximately $ __________ to apply to fixed costs.
(g) If price falls to $2 the firm will produce ________ units. Why?
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output
100 300 500 700 900
MC
ATC
AVC

2. Prices and Markets. Perfect Competition – Revision. Topic 7 2
2. A small scale grower supplies tomatoes to local fruit shops. Fixed costs facing the grower are $100, and
the variable cost data is given in the table below:
Output (Q) Total Variable Cost (TVC)
50 100
60 110
70 130
80 160
90 200
100 250
110 310
120 380
(a) For the output and cost figures given above, calculate the average variable cost (AVC) and
marginal cost (MC).
(b) Assume the grower operates under perfectly competitive conditions, and the price he receives is
currently $6 per kilogram. Determine the output level that would maximise the grower’s profits.
What are profits at this output level?
(c) If, due to an influx of new competition, the price of tomatoes falls to $3 per kilogram, explain
whether the grower should continue to produce in the short run and in the long run.
3. Using a perfectly competitive firm operating in the short run as a basis for your diagram, show and
explain the prices associated with the break even and shut down points, and explain the output ranges
over which the firm produces to make a positive economic profit and/or to minimise economic losses.
4. In long-run equilibrium, P = AC = MC. Of what significance for the allocation of resources is the equality
of MC and AC? Of what significance for the allocation of resources is the equality of P and MC?
5. Using a perfectly competitive firm operating in the short run as a basis for your
diagrams, show and explain how the firm can make economic profit, normal
profit and minimum economic loss; and show also the break even and shut down
points.

3. Prices and Markets. Perfect Competition – Revision. Topic 7 3
6. A perfectly competitive firm producing X has the following monthly cost data
(Q = total output, MC = marginal cost):
Q (units) MC ($)
1 40
2 37
3 32
4 28
5 30
6 32
7 35
8 40
9 46
10 56
(a) For each of the following prices determine this firm’s optimal output per month in the short run.
Show your calculations.
(i) $30.50
(ii) $32.40
(iii) $42.00
(b) Suppose the market price of X is $49.00. Calculate the total fixed cost that would result in zero
economic profit for this firm. Show your calculations.
(c) Suppose there are 400 firms in the perfectly competitive market for X, each with the same monthly
cost data as the above firm. Draw this market’s short run supply curve, indicating the specific
prices and quantities of output, on the assumption that the cost data are not affected by the
summation of the firms’ outputs.
(d) Suppose the market price of X is $60.00 and the total fixed cost of the above firm is $140 per
month.
(i) Initially, how would this firm react to the situation in the long run? Explain with the aid of your
calculations.
(ii) With the aid of diagrams (sketches will be sufficient – there is no need to plot the exact data)
showing both the firm and the market, explain how this market adjusts to long run
equilibrium.

4. Prices and Markets. Perfect Competition – Revision. Topic 7 4
7. A perfectly competitive firm has the following cost data:
Q AFC TVC
(units per day) ($) ($)
1 90 20
2 45 36
3 30 49
4 22.50 60
5 18 73
6 15 88
7 12.86 106
8 11.25 129
9 10 159
10 9 199
(a) For each of the following prices determine this firm’s profit-maximising
(or loss-minimising) output per day, in the short run, and calculate the daily
profit or loss. Show your calculations.
(a.1) $13.20
(a.2) $16.50
(a.3) $39.00
(b) Draw this firm’s short run supply curve, indicating the relevant numerical
values for price and output.
(c) Suppose this firm’s costs are the same as those of other firms in the perfectly
competitive industry. Indicate, together with a brief explanation, the
numerical value of the critical price level below which this firm will leave the
industry in the long run, and above which new firms will enter that industry in
the long run.

5. Prices and Markets. Perfect Competition – Revision. Topic 7 5
8. A perfectly competitive firm producing X has the following monthly cost data (Q = total output, MC =
marginal cost):
Q (units) MC ($)
1 40
2 37
3 32
4 28
5 30
6 32
7 35
8 40
9 46
10 56
(a) For each of the following prices determine this firm’s optimal output per month in the short run. Show
your calculations.
(a.i) $30.50
(a.ii) $32.40
(a.iii) $42.00
(b) Suppose the market price of X is $49.00. Calculate the total fixed cost that would result in a normal
profit for this firm. Show your calculations.
(c) Suppose there are 400 firms in the perfectly competitive X industry, each with the same monthly cost
data as the above firm. Draw this industry’s short run supply curve, indicating the specific prices and
quantities of output, on the assumption that the cost data are not affected by the summation of the
firms’ outputs.
(d) Suppose the market price of X is $44.00 and the total fixed cost of the above firm is $140 per month.
How will this firm react to this situation in the long run? Explain with the aid of your calculations.