Competitive Market Worksheet 2

Competitive Market Worksheet:

A single firm in a competitive market.

(
Price or
Cost

90
80
70
60
50
40
30
20
10
) (
Price or
Cost

$ 90
80
70
60
50
40
30
20
10
)

Count’s costs

Market Supply and Demand

(
MC
)

(
ATC
)

(
(
m
arket
)
supply
)

(
Demand
)

(

1 2 3 4 5

20 40
60 80 100 120 140
160

quantity
(
1,000 calculators/wk)

QUANTITY
(1,000 calculators /week)

)

The graph on the left shows the cost curves for Count, a company that produces calculators. The graph on the right shows Supply and Demand for the calculator market, which we will assume is competitive.

Part A: Short Run

Assume that the market is competitive and in short run equilibrium and that Count is making profit-maximizing short run decisions.

1. What is the current
market
price? $ ______ How many calculators are being produced per week in this
market
? _________

2. What price will Count charge? _______ Why will Count charge this price? ___________________________________

3. What is Count’s: Output (q): ________ At that output, what is MC ________ and ATC _________? Average profit per unit: $ ___________. (Note: If it is a loss, state it as a negative profit)

Part B Long Run

1. If other producers have the same costs as Count, and are making the same profits/losses as count is in question #4, what will happen to each of the following in the market in the long run:

Will firms enter or exit ______________________ Shift(s) in supply or demand ________________________________

Change in the price________________________. Change in the profits (losses) of firms. _______________________

2. Once the market has reached
long-run equilibrium
, what is the expected market price? $_____________ Explain why:______________________________________________________________________________

3. In long run equilibrium, all firms’ Marginal Cost will be = $ _____, since MC =______ ; all firms’ ATC will be $______ , since ATC in long run = ________ Each firm’s economic profit per unit = $ __________

4. What is the test or condition for productive efficiency? (A firm is producing efficiently if : ___________________________) Explain why a competitive market will achieve productive efficiency in the long run. ______________________________________