Unit 3.2 Perfect Competition Review. $20 15 10 5 0 Cost and Revenue MC AVC ATC 14 Should the firm...
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Transcript of Unit 3.2 Perfect Competition Review. $20 15 10 5 0 Cost and Revenue MC AVC ATC 14 Should the firm...
Unit 3.2
Perfect Competition
Review
$20
15
10
5
0
Cos
t an
d R
even
ue
MC
AVC
ATC14
Should the firm produce?What output should the firm produce?What is TR at that output? What is TC?How much profit or loss?
6
MR=D=AR= P
Yes10
TR=$140
Profit=$40 TC=$100
#1
2Q6 7 10
$20
15
10
5
0
Cos
t an
d R
even
ue
5 7
MC
MR=D=AR=P
AVCATC
11
What output should the firm produce?What is TR at MR=MC point?What is TC at MR=MC point?How much profit or loss?
9
Loss=Only Fixed Cost $5
Zero Shutdown (Price below AVC)$45
$55#2
3Q
$40
30
20
10
0
Cos
t an
d R
even
ue
6 8
MC
MR=D=AR=P
AVC
ATC
1519
What output should the firm produce?What is TR at that output?What is TC?How much profit or loss?
6$90
$120Loss= $30
#3
4Q
$35
30
25
20
0
Cos
t an
d R
even
ue
1 2 3 4 5 6 7 8 9 10
MC
AVC
ATC
MR=P
How much is the profit or loss?What is TR? What is TC?
Where is the Shutdown Price?
$300 $250$50
$22
22
Profit/Loss per unit? $5#4
P
Q
MCATC
Quantity
Pri
ce
Notice that the product is NOT being made at the lowest possible cost (ATC not at lowest point).
Is this Productively Efficient?
ProfitD=MR
P
Q
MC
ATC
Quantity
Pri
ce
Notice that the product is NOT being made at the lowest possible cost (ATC not at lowest point).
Is this Productively Efficient?
Loss
D=MR
$5 MR
15
MC
Quantity
Pri
ce
The marginal benefit to society is greater the
marginal cost.Not enough produced.
Society wants more
Is this Allocative Efficient?
20 Underallocation of resources
$3
$5 MR
22
MC
Quantity
Pri
ce
The marginal benefit to society is less than the
marginal cost. Too much Produced.Society wants less
20 Overallocation of resources
$7
Is this Allocative Efficient?
1. Is this firm in the short run or the long run? Explain.
The firm is in the short-run since it is generating profits (points: iecP)
2. What quantity should this individual firm produce? Why?
MR=MC at q3
3. What is the area of total revenue?
points: q3cp
4. What is the area of total cost?
points: ieq3
5. What is the area of profit?
points: iecp
6. What will happen in the long run? Why?Market supply will increase due to entrance of firms because of the short-run profits. Market price will fall causing MRDARP to decrease resulting in the firm operating at normal (zero) economic profit which is both allocative and productively efficient.
