# CRC Economics1. 2 Exercises Econ 304 Chapter 14 CRC Economics3 Do you know … how to determine the profit-maximizing output Q* of a perfectly competitive.

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CRC Economics1

2 Exercises Econ 304 Chapter 14

CRC Economics3 Do you know … how to determine the profit-maximizing output Q* of a perfectly competitive firm (in a table of data)? how to determine important information about a perfectly competitive firm (on a graph)? how to determine the profit of a perfectly competitive firm (on a graph)?

CRC Economics4 1. Determining Q* in a table Q 0 TR ? TC \$3  ? MRMC MM Should the firm produce this unit? (Yes/No) Given the following information about a perfectly competitive firm. Assume that P = \$5. Replace the ?’s with correct values. 1?\$5????? 2?\$8????? 3?\$12????? 4?\$17????? 5?\$23????? 6?\$30????? 7?\$38????? \$0 \$5 \$10 \$15 \$20 \$25 \$30 \$35 -\$3 \$0 \$2 \$3 \$2 \$0 -\$3 \$5 \$2\$3Yes \$3\$2Yes \$4\$1Yes \$5\$0Yes \$6-\$1No \$7-\$2No \$8-\$3No How much is the profit-maximizing output Q*, where MR = MC? How much is the profit? 4\$5 \$0\$3

CRC Economics5 Determining Q*? In the previous problem, what will be Q* and  if P = \$4? Q* = 3, where P = MR = \$3 = MC.  = \$0. P = \$6? Q* = 5, where P = MR = \$6 = MC.  = \$7. P = \$7? Q* = 6, where P = MR = \$7 = MC.  = \$12.

CRC Economics6 2. Determine important information on a graph Given the following information about a perfectly competitive firm. Replace the ?’s with correct labels. 1b? 3a? 3b? 1a? 2a? 2b? MC R AVC S ATC B How much is the shutdown price, Psh? The breakeven price, Pbr? Psh Pbr Determine the areas where  > 0,  = 0,  < 0; and shutdown area.  > 0  < 0 P > ATC P < ATC P = ATC  = 0 Shutdown area

CRC Economics7 2. Determine important information on a graph At what prices should the firm produce? At what prices should it shut down? 1b? 3a? 3b? 1a? 2a? 2b? MC R AVC S ATC B The firm should produce as long as P > Psh = \$8. The firm should shut down if P =< Psh = \$8. Psh Pbr  > 0  = 0  < 0 P > ATC P = ATC P < ATC

CRC Economics8 2. Determine important information on a graph What is the firm’s SR supply? LR supply? 1b? 3a? 3b? 1a? 2a? 2b? MC R AVC S ATC B The firm’s SR supply curve is the MC curve starting from point S. Psh Pbr  > 0  = 0  < 0 P > ATC P = ATC P < ATC S SR S LR The firm’s LR supply curve is the MC curve starting from point B.

CRC Economics9 2. Determining  on a graph The diagram shows information about a perfectly competitive firm. Label all curves, lines, and points. (Replace the ?’s with labels.) 1?2?3? 4? 5? 6? MCATCAVC P=AR=MR B S

CRC Economics10 2. Determining  on a graph Determine the profit-maximizing output Q*? Explain. MCATCAVC P=AR=MR E Q* At E, MR = MC So Q* = 4,000

CRC Economics11 2. Determining  on a graph Determine the total revenue TR = P x Q on the graph. How much is it? MCATCAVC P=AR=MR E Q* TR = (\$11 x 4,000) = \$44,000 P = \$11

CRC Economics12 2. Determining  on a graph Determine the variable cost VC = AVC x Q on the graph. How much is it? MCATCAVC P=AR=MR E Q* TR = (\$11 x 4,000) = \$44,000 AVC = \$6 VC = (\$6 x 4,000) = \$24,000

CRC Economics13 2. Determining  on a graph Determine the fixed cost FC = AFC x Q on the graph. How much is it? MCATCAVC P=AR=MR E Q* TR = (\$11 x 4,000) = \$44,000 AFC = \$2 VC = (\$6 x 4,000) = \$24,000 FC = (\$2 x 4,000) = \$8,000

CRC Economics14 2. Determining  on a graph Determine the total cost TC = VC + FC on the graph. How much is it? MCATCAVC P=AR=MR E Q* TR = (\$11 x 4,000) = \$44,000 VC = (\$7 x 4,000) = \$28,000 FC = (\$2 x 4,000) = \$8,000 TC = (\$8 x 4,000) = \$32,000 = \$8,000 + \$24,000 ATC = \$8

CRC Economics15 2. Determining  on a graph Determine the profit  = TR - TC on the graph. How much is it? MCATCAVC P=AR=MR E Q* TR = (\$11 x 4,000) = \$44,000 VC = (\$7 x 4,000) = \$28,000 FC = (\$1 x 4,000) = \$4,000 A  = \$3  = \$44,000 - \$32,000 = \$12,000 = \$3 x \$4,000 TC = (\$8 x 4,000) = \$32,000 = \$8,000 + \$24,000

CRC Economics16 Now you know … how to determine the profit-maximizing output Q* of a perfectly competitive firm (in a table of data). how to determine important information about a perfectly competitive firm (on a graph). how to determine the profit of a perfectly competitive firm (on a graph).

CRC Economics17

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