ASSIGNMENTS-SPRING 20141. Assignment A-4.1List and explain the characteristics of perfect competition.Use examples.A perfectly competitive market has the following characteristics.(i) The market consists of buyers and sellers who are price takers.(ii) Each firm in the market produces undifferentiated and homogenous products.(iii) Buyers and sellers have perfect information about the price prevailing in the mark! About the availability of commodities at any given point of time.(iv) Firms can enter or exit the market freely.Implications:The implications of all these features is that there is single price in the mark no individual buyer can change it. On this price a firm can sell any amount of output. Because of flu demand of a firm is perfectly elastic and hence a horizontal line at the market price. Another implication is that a firm will produce only when it is profitable to produce, otherwise it will stop the products.Example: A Perfectly Competitive Market is a market in which the buyers and sellers have a belief that their selling and buying decisions do not any effect on the market price. This market can only exist if there is homogeneity of products, low exit and entry barriers and a pure knowledge about product price, cost and quality.1. Assignment A-4.2Draw the market demand and the demand of a single firm in perfect competition. Draw and explain total revenue andmarginal revenue.

2. Assignment A-4.3Identify when a firm should maximize profits, minimize lossesor close down.On occasion, when the firms only prospect is incurring losses, the same MC = MR rule guides the entrepreneur to loss minimization. If the price at the loss-minimizing level of output is high enough to cover average variable costs, the firm should continue to produce in the short run. If the price at the loss-minimizing level of output is below average variable costs, the firm should shut down, producing nothing to minimize losses. Either way, the entrepreneur will face a loss because the firms fixed costs cannot all be covered in the short run. If this situation persists into the long run, the entrepreneur will go out of business.

3. Assignment A-4.4Establish that profit maximization is equivalent to marginal revenue being equal to marginal cost in the short run. Show it in a graph.Marginal revenue is the extra revenue generated when a firm sells one more unit of output. It plays a key role in the profit maximizing decision of a firm relative to marginal cost. A firm maximizes profit by equating marginal revenue, the extra revenue generated from production, with marginal cost, the extra cost of production. If these two marginal are not equal, then profit can be increased by producing more or less output.The relation between marginal revenue and the quantity of output produced depends on market structure. For a perfectly competitive firm, marginal revenue is equal to price and average revenue, all three of which are constant. For a monopoly, monopolistically competitive, or oligopoly firm, marginal revenue is less than average revenue and price, all three of which decrease with larger quantities of output. The constant or decreasing nature of marginal revenue is a prime indication of the market control of a firm.

ReferencePage 11. http://www.amosweb.com/cgi-bin/awb_nav.pl?s=wpd&c=dsp&k=marginal+revenue2. http://www.econ.yale.edu/~gjh9/econ115b/slides9_4perpage.pdf3. http://www.cliffsnotes.com/more-subjects/economics/perfect-competition/short-run-supply4. http://www4.ncsu.edu/~xchi/Lab%2012.pdf