Scenario 3a The Perfectly Competitive Market In a perfectly competitive market,
ID: 1129631 • Letter: S
Question
Scenario 3a The Perfectly Competitive Market In a perfectly competitive market, market demand is given by PE 81-20 and market supply is P 6Q + 1. Each firm has short run marginal cost MC = 120Q + 1, and short run average total cost ofATC-60Q + 375 Q +1, ATC for each firm is minimized at Q = 0.25 where min ATC = $31.00. Assume firms are profit maximizers. Scenario 3b The Monopoly Market Assume now that the market is served by a profit maximizing monopoly. The firm is sufficiently large that its marginal cost is equal to the market supply curve in Scenario 3a. Therefore, the monopoly firm's MC is MC 6Q The market demand equation still is P 81 -2Q and so the monopoly faces marginal revenue MR 81-4Q. The monopoly has a different total cost structure and its short run average total cost is constant at ATC S40. Refer to Scenario 3a. What price will a typical firm charge for its output? a. $10 b. $79 c. $61 d. $20 8.Explanation / Answer
Answer 8 - According to the given information in scenario (3a), solving for equilibrium price and quantity in perfectly competitive market. The demand function is, P = 81 - 2Q and supply curve is P = 6Q + 1. The equilibrium will be determined where quantity demand and quantity supply are equal. We can equate these inverse demand functions too.
81 - 2Q = 6Q + 1
80 = 8Q
Q = 10 units
Place value of market equilibrium quantity into supply function 'Q'. We get P = 6*10 + 1 = $61 per unit.
Option C is the correct answer.
Answer 9 - The perfectly competitive firms are price taker therefore, a firm will maximize its profit where P = MC
Short marginal cost function has been given, SRMC = 120Q + 1, now place it equal to market price,
P = SRMC
61 = 120Q + 1
120 Q =60
Q = 60/120
Q = 0.5 units
Option A is the correct answer.
Answer 10 - The short run marginal cost curve of a perfectly competitive firm shows its supply curve. We can find market supply curve by adding individual supply curve of perfectly competitive firm. We know that market supply is (Q* = 10 units) and an individual firm can supply on (q = 0.5 units) thus numbers of firm in the market are,
Numbers of firms in the market = Total market supply / supply of individual firm
Numbers of firms in the market = 10 / 0.5
Numbers of firms in the market = 20 firms
Option D is the correct answer.
Answer 11 - In the short run each firm earning total revenue of TR = 61 * 0.5
TR of individual firm = $30.5
Short run average total cost (SRATC) = 60q + 3.75/q + 1, we know that individual firm is producing (q=0.5 units). At this level of output SRATC of the firm is = 60 * 0.5 + (3.75 / 0.5) + 1
SRATC = 30 + 1 + 7.5
SRATC = 38.5
Then TC = 35.5*0.5
TC = $19.25
Profit = TR - TC
Profit = 30.5 - 19.25
Profit = $11.25
Option B is the correct answer.
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