Economics and Perfect Competition Essay - 1032 Words

Answers to End-of-Chapter Questions in Chapter 6 1. A perfectly competitive firm faces a price of  £14 per unit. It has the following short-run cost schedule: Output |0 |1 |2 |3 |4 |5 |6 |7 |8 | |TC ( £) |10 |18 |24 |30 |38 |50 |66 |91 |120 | | (a) Copy the table and put in additional rows for average cost and marginal cost at each level of output. (Enter the figures for marginal cost in the space between each column.) (b) Plot AC, MC and MR on a diagram. (c) Mark the profit-maximising output. (d) How much (supernormal) profit is made at this output? e) What would happen to the price in the long run if this firm were typical of others in the industry? Why would we need to know information about long-run†¦show more content†¦The firm cannot affect industry price by changing its output. In other words, any change in an individual firm’s output would cause such a minute movement along the industry demand curve, that price would not change. 3. If supernormal profits are competed away under perfect competition, why will firms have an incentive to become more efficient? Because if they did not do so, and other firms did, firms would still enter the industry and compete price down. The firms that had not become more efficient would then find themselves making less than normal profit. They would then either have to become more efficient pretty quickly, or go out of business. 4. Is it a valid criticism of perfect competition to argue that it is incompatible with economies of scale? The criticism should really be directed at the market system as a whole: that where significant economies of scale exist, markets are bound to be imperfect. Of course, there may be significant benefits to consumers and society generally from such imperfect markets (see pages 184–5): there are advantages as well as disadvantages of imperfect markets. What is more, if the market is highly contestable, many of the advantages of perfect competition may be achieved even though the industry is actually a monopoly (or oligopoly). 5. On a diagram similar to Figure 6.4,; show the long-run equilibrium for both firm and industry under perfect competition. Now assume thatShow MoreRelatedCompetition : Perfect Competition Is An Economic Concept Essay1157 Words   |  5 Pages Question 7 Perfect competition: Perfect competition is an economic concept, there are lots of seller’s sells homogeneous products in the market and there are many buyers. There are no barriers to enter into the market. Furthermore both the buyers and sellers have good information regarding price so that sellers can offer a competitive price to the buyers and also buyers can compare the price to have the best choice. 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