Perfect

 Competition  Consultants    
Four  perfectly  competitive  firms  have  hired  you  as  their  economic  advisor.  The  only  concern  they  have  is  to  maximize  profits.  Based  on  your  
analysis  of  the  data  of  each  of  their  situations,  what  would  you  advise  each  of  these  firms  to  do,  and  why?  Here  are  your  options:  

1) Raise  Price   4) Decrease  Quantity    

2) Lower  Price   5) Remain  at  Present  Position  
3) Increase  Quantity     6) Shut  Down    
For  each  firm,  fill  in  the  remaining  numbers  on  the  chart,  decide  which  option  you  will  advise  the  firm,  and  explain  your  rationale  for  choosing  
that  option.  For  fun,  determine  four  different  types  of  products  we  would  see  in  a  perfectly  competitive  market  and  name  the  firms  accordingly.    

Firm   Price   Quantity   Total     Total     Profit  or     Total   Average   Average   Marginal  
Revenue   Cost   Loss   Variable   Total  Cost     Variable   Cost  
Cost   Cost  
1   4           300   3.5   3   5  
2     20   200     -­‐300       5   10  
3         5100   -­‐100   3000     30   90  
4   25   100       0   2000     20    
 

Firm  1    

What  should  they  do?           Rationale:  

Firm  2    

What  should  they  do?           Rationale:  

Firm  3    

What  should  they  do?           Rationale:  

Firm  4    

What  should  they  do?           Rationale:  

  

Perfect  Competition  Consultants  (Graphing  Practice)    

You  will  work  through  three  separate  problems  all  involving  the  beef  market.  All  three  firms  are  in  perfect  
competition,  and  the  owners  of  all  three  know  that  they  should  produce  when  MR=MC.  Complete  all  graphs  
on  a  separate  sheet  of  paper.  Quantity  is  in  pounds  of  beef.  

1) Daisy’s  Beef  Company  is  a  firm  in  perfect  competition  and  is  currently  selling  ten  pounds  of  rib  eye  steak  at  a  price  of  $14.00.  Currently  
Daisy’s  Beef  is  making  $40  in  profit.    
a. What  is  the  Total  Revenue?  What  is  the  Total  Cost?  
b. Graph  the  market  for  rib  eye  steak  and  Daisy’s  individual  firm.  Appropriately  place  all  labels  and  curves  (Supply,  Demand,  
Marginal  Cost,  Average  Total  Cost,  Average  Variable  Cost).  Note:  exact  numbers  are  not  known  for  quantity  in  the  industry  and  
for  the  average  variable  cost  curve).    
c. Should  Daisy  stay  in  business  or  shut  down  in  the  short  and  long  runs?    
 
 
2) Bessie’s  Beef  Company  is  a  firm  in  perfect  competition  and  is  currently  selling  five  pounds  of  Sirloin  steaks  at  a  price  of  $9.  Bessie’s  total  
cost  of  producing  is  $55  and  total  variable  cost  is  $50.    
a. What  is  Bessie’s  profit  or  loss?    
b. What  is  Bessie’s  Total  Fixed  Costs?    
c. Graph  the  market  for  sirloin  steak  and  Bessie’s  individual  firm.  Appropriately  place  all  labels  and  curves  (Supply,  Demand,  
Marginal  Cost,  Average  Total  Cost,  Average  Variable  Cost).  Note:  exact  numbers  are  not  known  for  quantity  in  the  industry.    
d. Should  Bessie  stay  in  business  or  shut  down  in  the  short  and  long  runs?  
e. Wait!  Bessie  doesn’t  understand  why  she  is  doing  so  poorly.  She  is  following  the  optimal  output  rule  (MR=MC).  What  is  wrong  in  
her  thinking?  
 
3) Flossie’s  Beef  Company  is  a  firm  in  perfect  competition  and  is  currently  selling  six  pounds  of  T-­‐Bone  steaks  at  a  price  of  $15.00.  Flossie’s  
total  cost  of  producing  is  $120.00  and  total  variable  cost  is  $60.00.    
a. What  is  Flossie’s  profit  or  loss?    
b. What  is  Flossie’s  Total  Fixed  Costs?    
c. Graph  the  market  for  T-­‐bone  steak  and  Flossie’s  individual  firm.  Appropriately  place  all  labels  and  curves  (Supply,  Demand,  
Marginal  Cost,  Average  Total  Cost,  Average  Variable  Cost).  Note:  exact  numbers  are  not  known  for  quantity  in  the  industry.    
d. Flossie’s  lease  runs  out  at  the  end  of  the  month.  What  should  she  do  at  that  point  (stay  in  business  or  shut  down)?  What  should  
she  do  in  the  meantime  (stay  in  business  or  shut  down)?