Exam 9: Firms in Perfectly Competitive Markets

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a∙The perfectly competitive firm is a price taker and therefore faces a perfectly elastic demand curve which is also the MR curve.
b∙Market price = $40
c∙Profit maximizing output = 200
d∙Total revenue = $40 × 200 = $8,000
e∙Total cost = ATC × total output = $24 × 200 = $4,800
f∙Profit = Total revenue - total cost = $8,000 - 4,800 = $3,200
g∙Total fixed cost = AFC × total output = (ATC - AVC)× 150 = $6 × 150 = $900.(Note: fixed cost has the same value at all output rates)
h∙The total variable cost at the profit maximizing output level = ($4,800 - 900)= $3,900
i∙The firm's short run supply curve is its MC curve above minimum AVC (from point b and above).
j∙No,the industry is not in a long-run equilibrium because the firm earns an economic profit.
k∙Some firms will enter the industry,causing the industry supply curve to shift rightward.This causes market price to fall.Entry stops when economic profits are eliminated and all firms break even.
l∙In the long-run equilibrium the firm's profit maximizing quantity = 150,where price will equal marginal cost.