Microeconomics - GSLC 1

Nama Kelompok :

 Elmarian Haessel - 2101675602

 Fernanda Firstian - 2101681813
 Hedianto Samiaji Rachmadi - 2101679336
 M. Ilham Arsyad - 2101707263
 Poppy Yuliani - 2101676233
 Saputra Crespin - 2101708046
 Stella Maris J P - 2101683024
 Suryan Hartanto - 2101677646

QUESTION

1. What is meant by a competitive firm? Give examples

2. Under what conditions will a firm shut down temporarily? Explain! Give example!
3. Under what conditions will a firm exit a market? Explain! Give example!
4. Does a firm’s price equal marginal cost in the short run, in the long run, or both? Explain!
5. Does a firm’s price equal the minimum of average total cost in the short run, in the long run,
or both? Explain!
6. Are market supply curves typically more elastic in the short run or in the long run? Explain!
7. What are the characteristics of a competitive market? Which of the following drinks do you
think is best described by these characteristics? Why aren’t the others?
a. Mineral water
b. Cola
c. Syrup
8. The licorice industry is competitive. Each frim produces 2 million strings of licorice per year.
The strings have an average total cost of $0.20 each and they sell for $0.30.
a. What is the marginal cost of a string?
b. Is this industry in long run equilibrium? Why or why not?
9. Bob’s lawn-mowing service is a profit-maximizing, competitive firm. Bob mows lawns for
$27 each. His total cost each day is $280. Of which $30 is a fixed cost. He mows 10 lawns a
day. What can you say about Bob’s short-run decision regarding shut down and his long-run
decision regarding exit?
ANSWER

1. A competitive firm is one in which a large number of other firm compete with each other
to satisfy the wants and needs of a large number of consumers. No single producer, or
group of producers, and no single consumer, or group of consumers, can dictate how the
firm operates. Firm has to make sure he can sell all he produces. But this really depends
on the demand curve, and its belied about how other firms in the market will behave, the
ease with which firms can enter and leave the market and the ability of firms to
differentiate their products from those of their rivals. Firms is a price-takers.

Examples:
1) There are 40,000 apple farms in the US. One of them charges a different, higher, price
than the others will result in no-sale. Consumers buy the same apples from others. A farm
also has no incentives to decrease the price since this will not increase profit.

2) A small farmer who produces raspberries and sells them frozen for $4 per pack. The
sale of one pack of raspberries will bring in $4, two packs will be $8, three packs will be
$12, and so on. If, for example, the price of frozen raspberries doubles to $8 per pack,
then sales of one pack of raspberries will be $8, two packs will be $16, three packs will
be $24, and so on.

2. A firm will shut down temporarily if the revenue it would get from producing is less than
the variable costs of production. This occurs if price is less than average variable cost.
This is the example

3. A firm will exit a market if the revenue it would get if it stayed in business is less than its
total cost. This occurs if price is less than average total cost.
4. A firm's price equals marginal cost in both the short run and the long run. In both the
short run and the long run, price equals marginal revenue. The firm should increase
 output as long as marginal revenue exceeds marginal cost, and reduce output if marginal
revenue is less than marginal cost. Profits are maximized when marginal revenue equals
marginal cost.
5. The firm's price equals the minimum of average total cost only in the long run. In the
short run, price may be greater than average total cost, in which case the firm is making
profits, or price may be less than average total cost, in which case the firm is making
losses. But the situation is different in the long run. If firms are making profits, other
firms will enter the industry, which will lower the price of the good. If firms are making
losses, they will exit the industry, which will raise the price of the good. Entry or exit
continues until firms are making neither profits nor losses. At that point, price equals
average total cost.
6. Market supply curves are typically more elastic in the long run than in the short run. In a
competitive market, since entry or exit occurs until price equals the minimum of average
total cost, the supply curve is perfectly elastic in the long run.
7. A competitive market is one in which:
(1) there are many buyers and many sellers in the market
(2) the goods offered by the various sellers are largely the same
(3) usually firms can freely enter or exit the market.
Of these goods, bottled water is probably the closest to a competitive market. Tap water
is a natural monopoly because there's only one seller. Cola and beer are not perfectly
competitive because every brand is slightly different.
8. The liquorice industry is competitive. Each firm produces 2 million liquorice bootlaces
per year. The bootlaces have an average total cost of €0.20 each, and they sell for €0.30.
a) What is the marginal cost of a liquorice bootlace? Since P=MC in equilibrium, price
would be €0.30 (the value of the marginal cost)
b) Is this industry in long-run equilibrium? Why or why not? It’s not in long-run
equilibrium because price exceeds ATC
9. Because Bob’s average total cost is $280/10 = $28, which is greater than the price, he
will exit the industry in the long run. Because fixed cost is $30, average variable cost is
($280 − $30)/10 = $25, which is less than price, so Bob will not shut down in the short
run.