Solution to the Problem Set

NAME: ________ _______ DATE: 05/02/12

CHAPTER FOURTEEN PROBLEM SET

Give the best answer to each of the following questions.

1. Suppose your study partner constructed a list of the following conditions of a perfectly competitive market. Circle those that he got correct and fix those that he got wrong.

There are NO barriers to entry. Firms are Price takers.

Firms’ products are identical. There is complete information.

Firms maximize market share. The number of firms is large.

2. Given the marginal cost information below, answer the following questions:

Output | Marginal costs | a. The firm can sell a helmet for $34 and the firm is producing 6 helmets. Would increasing output increase or decrease profit? Ans :- Increasing output will decrease profit. b. The firm can sell a helmet for $34 and the firm is producing 4 helmets. Would increasing output increase or decrease profit?Ans :- Increasing output will increase profit. |

1 | 15 | |

2 | 12 | |

3 | 20 | |

4 | 27 | |

5 | 34 | |

6 | 40 | |

7 | 47 | |

| | |

c. The firm can sell a helmet for $34. What is the profit-maximizing level of output? Ans :- The Profit-Maximizing level of output is 5. |

3. Why is the marginal revenue for a firm in perfect competition equal to the market price?

Ans :- For a perfectly competitive firm with no market control, the marginal revenue curve is a horizontal line. Because a perfectly competitive firm is a price taker and faces a horizontal demand curve, its marginal revenue curve is also horizontal and coincides with its demand curve.

4. Briefly explain why the following statements are either TRUE or FALSE:

a. Perfectly competitive firms can never earn economic profit.

Ans:- True, since other firms enter the market the market supply curve will cause prices to fall

b. Perfectly competitive firms seek to maximize both per-unit and total...