Managerial Economics – Tutorial – Perfect Competition

Hint: Tutorial questions are comprehensive. However, the respective lecturers should utilize
the questions based on the depth of the knowledge acquisition by students.
Essay Questions
1. If a firm operates at a loss, the loss is equal to TC - TR. If the firm shuts down instead, its loss
is equal to FC. Given this, show that price must exceed AVC for the firm to operate at a loss and
not shut down.

2. Firms in the sandbox industry have the long-run cost curve

C(q) = F + 6q + 5q2
Where F is a positive constant. The sandbox industry has a market demand of p = 90 - 2q
a. Suppose F=20. What is the competitive equilibrium price, quantity and number of firms?
b. Suppose F is actually an accreditation fee established by the sandbox sellers association. A
firm that avoids this fee will not be able to operate in the industry, and is therefore mandatory.
How does the equilibrium price and number of firms vary with F? You do not have to use calculus,
but explain whether each increases or decreases with F. How does the profit of each firm vary with
F?

3. Suppose market demand is Q = 1000 - 4p. If all firms have LRAC = 50 - 5q + q2, how many
identical firms will there be when this industry is in long-run equilibrium?

4. Explain why individual firms in competitive markets face more elastic demand curves than the
market as a whole.

5. The above figure shows the cost curves for a typical firm in a competitive market. From the
graph, estimate the firm's profits when price equals $10 per unit.

6. The above figure shows the cost curves for a typical firm in a competitive market. If there are
200 identical firms, estimate the market quantity supplied when p = 4, 8, and 10.

7. Consider a competitive firm with the short-run cost function

C(q) = 20 + 6q + 5q2
The firm faces a market price of p for its output.
a. Derive the firm's profit maximizing condition. Is the sufficient second order condition
satisfied?
b. Suppose a specific tax of t (t < p) is levied on only this firm in the industry. What is the profit
maximizing level of output as a function of p and t? (Assume the price is high enough that the
firm does not shut down)
c. How does the output change as the tax increases? Use calculus to determine the relevant
comparative static.
d. How does the firm's profit chance as the tax increases? Again, use calculus to determine the
relevant comparative static. Show that profit decreases as t increases.
Multiple Choice Questions

1. Suppose TC = 10 + (0.1 ∗ q2). If there are 100 identical firms in the market, the market
supply
curve is
A) Q = 1000 ∗ p.
B) Q = 500 ∗ p.
C) Q = 100 ∗ p.
D) Q = 10.

2. The above figure shows the cost curves for a typical firm in a market and three possible
market supply curves. If there are 100 identical firms, the market supply curve is best
represented by
A) curve A.
B) curve B.
C) curve C.
D) either curve A or B, but definitely not C

3. A horizontal demand curve for a firm implies that

A) the firm is a monopoly.
B) the market the firm is operating in is not competitive.
C) the firm is selling in a competitive market.
D) the products of that firm are very different from other firms' products.
4. A small business owner earns $50,000 in revenue annually. The explicit annual costs equal
$30,000. The owner could work for someone else and earn $25,000 annually. The owner's
business profit is ________ and the economic profit is ________.
A) $20,000, $5,000
B) $20,000, -$5,000
C) $25,000, -$5,000
D) $45,000, -$5,000

5. The above figure shows the cost curves for a competitive firm. If the firm is to earn economic
profit, price must exceed
A) $0.
B) $5.
C) $10.
D) $11.

6. The above figure shows the cost curves for a competitive firm. The firm will incur economic
losses if the price is less than
A) $0.
B) $5.
C) $10.
D) $11.

7. The above figure shows the cost curves for a competitive firm. If the market price is $15 per
unit, the firm will earn profits of
A) $0.
B) $4.
C) $40.
D) $160.