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Instant Download PDF Microeconomics 9th Edition Boyes Solutions Manual Full Chapter
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CHAPTER 23
(MICRO CHAPTER 9)
Perfect Competition
FUNDAMENTAL QUESTIONS
1. What is perfect competition?
2. What does the demand curve facing the individual firm look like, and why?
3. How does the firm maximize profit in the short run?
4. At what point does a firm decide to suspend operations?
5. When will a firm shut down permanently?
6. What is the break-even price?
7. What is the firm’s supply curve in the short run?
8. What is the firm’s supply curve in the long run?
9. What are the long-run equilibrium results of a perfectly competitive market?
Copyright © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or
in part.
160 Chapter 23: Perfect Competition
Copyright © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or
in part.
Chapter 23: Perfect Competition 161
A. The market supply curve and exit and entry: The market supply curve shifts to the right
when firms enter the industry, and it shifts to the left when firms leave. Firms enter when
profits are being made, thereby shifting the market supply curve to the right and lowering
market price. Firms leave when economic losses are being incurred, thereby shifting the
market supply curve to the left and raising the market price.
Teaching Strategy: Carefully draw Figure 5, showing market D and S on the left and the
firm’s revenue/cost data on the right. Begin with a market price that generates a profit for the
firm. Be sure to connect price from the left-hand graph carefully to price on the right-hand
graph.
B. Normal profit in the long run
Teaching Strategy: Show how losses drive firms out of the industry, which decreases
market supply and raises price. Raise price only equal to minimal LRATC. Follow Figure 5.
Teaching Strategy: Show that when P = minimal LRATC, firms are making only normal
(zero economic) profits. No firms enter or leave; thus, the market is in long-run equilibrium.
C. The predictions of the model of perfect competition: These are zero economic profits (MR =
MC), production at the minimum point on LRATC, and price = MC (economic efficiency).
1. Consumer and producer surplus: When the firm receives a price above MC.
Teaching Strategy: Show how rent control reduces producer surplus by explaining
Figure 7.
ANSWERS TO EXERCISES
1.
a.
Output Fixed AFC Variable AVC Total ATC MC
Cost Cost Cost
1.00 50.00 50.00 30.00 30.00 80.00 80.00 30.00
2.00 50.00 25.00 50.00 25.00 100.00 50.00 20.00
3.00 50.00 16.67 80.00 26.67 130.00 43.33 30.00
4.00 50.00 12.50 120.00 30.00 170.00 42.50 40.00
5.00 50.00 10.00 170.00 34.00 220.00 44.00 50.00
Copyright © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or
in part.
162 Chapter 23: Perfect Competition
Copyright © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or
in part.
Chapter 23: Perfect Competition 163
7. Illegal drugs are a market where many sellers exist, producing and selling a standardized product
to many consumers, with free entry into the market.
This model predicts that only normal profits will be made by producers in the long run, with
prices equaling MC (consumer efficiency) and sellers producing where MR = MC (economic
efficiency) at minimal LRATC.
In the short run, the impact of the war on drugs will be to increase costs of production and thus
increase prices as supplies of drugs are confiscated by the government. In the long run, the higher
prices may mean entry by more drug dealers and a return to or near the original (lower)
equilibrium price. The government may be able to permanently decrease market supply, causing
equilibrium prices to increase to the consumer. If entry is virtually unrestricted, it is unlikely that
the government will be able to permanently cut supply and increase drug prices.
8. Even though perfect competition does not exist in real life, the study of perfect competition allows
one to simulate optimal economic results, which include consumer and economic efficiency.
These results can then be compared to what is happening in the real world.
The relevance to switch careers was that if entry is free, an entrepreneur can leave one
unprofitable industry and go into a potentially more profitable one.
Social problems such as acid rain and pollution occur because the firm is not forced to include
these added costs of operation and thus produces too much at an inefficient point. The firm should
be forced by government involvement to take account of pollution damage, raise prices, and
reduce production.
9. To say that too much electricity is generated implies that costs exceed benefits at a particular level
of production and that society would benefit from a decline in electricity production. To say that
too little education is produced implies that benefits exceed costs at a particular level of education
and that society would benefit from allocating more resources to education.
In the case of electricity, the firm produces at an output level greater than minimum ATC; for the
education example, production occurs at a level less than minimum ATC.
10. No. The loss in consumer surplus (pool users) and producer surplus (pool builders) may exceed
the “market” value of the loss arising from injury. Despite the difficulty of estimating the value of
human injury (which includes the value of a human life), the overall loss in producer/consumer
surplus to society would exceed the benefits of fewer injuries if swimming pools were banned. A
net overall loss would result.
11.
a. The shares of stock of individual firms are different. To become a broker on the exchange is
a very costly and difficult process—entry is restricted. These features do not match those of
the model of perfect competition. However, there are many hundreds of thousands of shares
of stock and hundreds of thousands of buyers. No one buyer or seller can dictate the price—
it is determined through the process of market exchange. These features match the model of
perfect competition very well.
b. There are few firms, entry is very difficult, and products are differentiated. There is no
resemblance to a purely competitive market.
c. The entire electronics market resembles perfect competition because entry in some facet is
not too difficult and the products are very similar. In any specific area, such as DVD players
or PCs, the products are differentiated, the number of firms is relatively small, and entry is
difficult.
Copyright © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or
in part.
164 Chapter 23: Perfect Competition
d. Colleges compete for students and students offer their attendance to colleges. There are
many sellers; however, the products are differentiated among the different colleges that a
student can attend.
12. Macy’s could not earn sufficient revenue to cover its variable costs in the short run and all its
costs in the long run.
13. The short run is a period of time in which at least one resource cannot be varied. The long run is a
period of time sufficiently long that all resource quantities are variable. Only in the long run can
firms acquire different quantities of all resources, so only in the long run can entry and exit occur.
Whether entry or exit is easier depends on the industry. There is no rule stating that entry is more
difficult than exit.
14.
a. Price is $14 and quantity is 15.
b. The curves are market curves; supply is the sum of the individual firm marginal-cost curves
(above average total cost in the long run).
c. Consumer surplus is the area below the demand curve and above the price of $14. Producer
surplus is the area above the supply curve and below the price of $14.
d. A price ceiling of $12 means that consumers pay less than $14. The price ceiling increases
consumer surplus and reduces producer surplus. The consumer surplus becomes the area
above $12 and below the demand curve; the producer surplus becomes the area below $12
and above the supply curve. A price floor of $16 reduces consumer surplus and increases
producer surplus. The consumer surplus is the area below the demand curve and above $16;
the producer surplus is the area above the supply curve and below $16.
15. According to the model of perfect competition, if one U.S. farmer decided to set the price of corn
higher than others, no one would purchase the higher-priced corn because the identical product
could be purchased without difficulty at the lower price. The price of corn is determined solely by
supply and demand in the market for corn.
16. Gains from trade are the benefits from market exchange, or the sum of the consumer surplus and
the producer surplus.
17. The graph is #16 displays gains from trade as the sum of consumer surplus and producer surplus.
Consumer surplus is the difference between what consumers would be willing and able to pay for
a product and the price they actually have to pay to buy a product. Producer surplus is the
difference between the price that firms would have been willing and able to accept for their
products and the price they actually receive.
Copyright © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or
in part.
Chapter 23: Perfect Competition 165
To be correct, the marginal revenue must be above the minimum point of average total cost
(ATC). The firm’s short run supply curve is marginal cost (MC) above where it intersects average
variable cost (AVC).
3. In the short run, the firm has fixed costs (for example, rent or mortgage payments) that it must pay
even if it produces no output. If the firm just covers its variable costs, it takes the same loss
whether it produces or shuts down. If it can take in revenue greater than its variable costs, it will
take a smaller loss by producing than it will by shutting down.
4.
a. ATC
b. ATC
c. AVC, ATC
d. AVC
5. At its current output, Josie’s firm is producing at the lowest point on its average variable cost
curve, so its marginal cost and average variable costs are equal ($50, in this case). Price and
marginal revenue are equal for a perfectly competitive firm, so Josie’s marginal revenue is equal
to its price, $90. Because marginal revenue is greater than marginal cost at this output ($90 >
$50), the firm should increase its output. We know that the firm should not shut down in the short
run because its price of $90 is greater than its average variable cost of $50. Josie will take a larger
loss if she shuts down.
The correct answer is increase output. Because Josie is in a perfectly competitive industry, she
can’t change her price. She also can’t leave the industry in the short run. (She might call home if
anyone there is rich.)
At its current output, Josie’s firm has total fixed costs of $100,000 and total variable costs of
$100,000 (TVC = AVC × Q = $50 × 2,000 = $100,000). Its total costs at this output are therefore
Copyright © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or
in part.
166 Chapter 23: Perfect Competition
$200,000 (TC = TFC + TVC = $100,000 + $100,000 = $200,000). Its average total cost is $100
(ATC = TC/Q = $200,000/2,000 = $100). Because its price is below its average total cost ($90 <
$100), the firm should leave the industry in the long run. In the short run, it could not leave the
industry because it had some fixed input that could not be varied.
Copyright © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or
in part.
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Language: English
CAIRO TO KISUMU
EGYPT—THE SUDAN—KENYA COLONY
ON THE GREAT ASWAN DAM
“The dam serves also as a bridge over the Nile. I crossed on a car, my motive
power being two Arab boys who trotted behind.”
BY
FRANK G. CARPENTER
LITT.D., F.R.G.S.