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Shaurya Verma
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5.1.

1. In perfect competition, every firm is a price taker and sets their price at market price,
so if they raise prices beyond market price no customer will buy their product.
Likewise, they can sell at any quantity they want at market price, so they have no
incentive to lower the price below market price.

2. Demand for a perfectly competitive industry is downward sloping. Even in perfect


competition, the Law of Demand applies; customers are less willing and able to pay
higher prices, and are more willing and able to pay lower prices, so as price
decreases, customers’ quantity demanded increases, and as price increases,
customers’ quantity demanded decreases.
3. The two demand curves are similar because they both show demand in a perfectly
competitive market.They are different because the first one shows the firm in a
perfectly competitive industry faces, while the second one shows the overall
downward-sloping demand all industries, even perfectly competitive ones face, due
to the Law of Demand.
2.

The highest difference between tc and tr is at 7 and so output is 7


- The maximum profit is $420; this number is calculated by Output * (Demand-ATC),
where output is the profit maximizing outputwhere MC and MR intersect. Since the
MR and MC intersect between output = 7 and output = 8, you round down to 7.

C. Elmer should produce 8 bushels of wheat because that is where his profit is maximized.
This is seen in the difference between TR and TC, which = 670 at output = 8

D. Marginal costs at first decline, causing increasing marginal returns. This is because fixed
cost is spread across more and more units, while the average variable cost goes down.
However, after 6 bushels, the marginal costs start to increase

E. The MC curve crosses the ATC curve at the ATC curve’s minimum; this point is important
because it is the point of productive efficiency, or the largest possible output at the lowest
possible cost.

3.

A. the marginal cost curve above the point where MC and AVC intersect. This is
because the firm won’t produce at output levels where it can’t cover its vc; moreover,
firms will produce at a leve lwhere the MR = MC

B. The portion of the marginal cost curve that is above the point it intersects with the
average-variable-cost curve, called the shutdown point. If a firm is producing above
its shutdown point, it knows to continue producing in the short term even if it is
making a loss. If a firm is producing below its shutdown point, it knows to stop
production until it can produce above its shutdown point.

C. The shutdown point is where the MC and AVC curves intersect. The break-even point
is where the MC and ATC curves intersect. The profit-maximization point is where the
MC and MR curves intersect.

4.

A.

This shows positive economic profits as the mc = mr at a point higher than the atc.

2. shows the shutdown point because it shows the point where the MC and AVC curves
intersect. The firm’s marginal cost and marginal revenue intersect at a point above it’s AVC;
therefore, it will continue to produce since to minimize losses by paying off fixed costs.
3. The firm is not shutting down because it’s loss is not equal to its fixed costs, whereas by
producing at a loss-minimising output, it can cover its entire variable cost and some of its
fixed costs, as opposed to covering none of the fixed costs.

4. shows the shutdown point because it shows the point where the MC and AVC curves
intersect. The firm will not produce at any output below this level because it cannot cover its
variable costs

5. If the firm shuts down, it will still have to pay its fixed costs such as rent, insurance,
and utitlies

6.In the short run, the firm is considered to be out of business since it has ceased
production. However, it may resume production later if prices rise beyond the AVC or
if the AVC falls below prices, or both.

7.

The price on both graphs is the same. This is because the price that a firm in a perfectly
competitive market can sell at is equal to the equilibrium price of the industry, since any price
above will result in no demand

8. Economic profits attract more firms to enter the industry, lowering profits back to zero in
the long run; if profits become negative then firms leave the industry, causing the remaining
firms to gain revenue and make a normal profit again.
9.

More firms would enter the industry, attracted by the positive economic profits more firms
would join and would generate less revenue, this would continue until firms make a normal
profit.

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