Question 1 (b)

  • Graph for a profit-maximizing firm in a perfectly competitive constant-cost industry earning positive economic profit

    • Label Market and Firm above each graph

    MARKET QUANTITY FIRM MC ATC QUANTITY

  • AR = Price

    For a perfectly competitive firm average revenue is also equal to marginal revenue. Average revenue for a perfectly competitive firm is often depicted by a horizontal average revenue curve. Average revenue is the revenue generated per unit of output sold. 01 2 S 10 Average revenue for a perfectly competitive - AmosWEB is Economics www.amosweb.com/.../awb\_nav.pl?...average%20revenue,%20perfect%20competition

Question 1 (c)

  • For a company in a perfectly competitive market

    • Raising the price --> Quantity falls to 0 --> Total Revenue falls to 0

    • Because the firm is a price taker / is facing a perfectly elastic demand / losses all of its customers / has no market power

Question 1 (d)

  • Lump sum subsidy has no effect on marginal revenue or marginal cost

  • Only fixed costs will be affected.

  • Positive profits lead to entry of new firms that will increase the industry supply.

Question 3 (e)

i)ud ru\!Gu0 001 aoud ut aiurqo aamiaond puetuap JO papuetuap Kmuenb = aogd u\! ajueqo ainu

The price elasticity of demand determines whether the demand curve is steep or flat. Note that all percentage changes are calculated using the midpoint method 2.... 2.. 2.. 1 FIGURE The Price Elasticity of Demand (a) Perfectly Inelastic Demand: Elasticity Equals 0 (b) Inelastic Demand: Elasticity Is Less Than 1 Price $5 4 1. An Increase n price . 0 Price $5 4 Increase •n price 0 Demand IOO Price $5 4 Increase In pnce . Quantity 90 IOO Demand Quantity leaves the quantity demanded unchanged. .. leads to an 11% decrease in quantity demanded. (c) Unit Elastic Demand: Elasticity Equals 1 Price $5 4 Increase In price 0 IOO Demand Quantity .. leads to a 22% decrease in quantity demanded. 2.. (d) Elastic Demand: Elasticity Is Greater Than 1 50 IOO Demand Quantity Price $4 0 (e) Perfectly Elastic Demand: Elasticity Equals Infinity . At any price above $4, quantity manded is zero. Demand . At exactly $4, consumers will buy any quantity. Quantity .. leads to a 67% decrease in quantity demanded. 3. At a price below $4, quantity demanded is infinite.

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