Perfect Competition
1. What is the difference between economic profit and producer surplus? (1 point)
2. Suppose a given industry is characterized by perfect competition, so each firm is earning zero
economic profit. If the product price falls, no firms can survive. Do you agree or disagree
with this statement? Explain your answer. (1 point)
3. At its current level of production a profit-maximizing firm in a competitive market receives
$15 for each unit it produces, and faces an average cost of $10. At the market price of $15,
the firm’s marginal cost curve crosses the marginal revenue curve at an output level of 1000
units. Draw a diagram that depicts the typical firm in this market. What is the firm’s current
profit? What is likely to occur in this market and why? (2 points)
4. If each firm in the shoe industry is operating where p = LRMC, does it follow that the
industry is in long-run equilibrium? Explain your answer (1 point)
5. Assume the market for wheat is perfectly competitive. The market price is $12 per bushel,
the firms face fixed costs of $1000, and variable costs of $300 per worker per week. Fill in
the Table below. What is the profit maximizing level of output? (2 points)
L Q TC MC TR MR Profit
0 0
1 50
2 110
3 180
4 240
5 290
6 315
7 335
8 350
6. Suppose that a competitive firm’s MC = 3 + 2q, AVC = 3 + q, and FC = 3. Assume that the
market price is $9 per unit. (1.5 points)
a) What level of output will the firm produce?
b) What is the firm’s producer surplus?
c) Will the firm be earning a positive, negative or zero profit in the short run?
7. How would each of the following affect the long-run supply of apples? (1.5 points)
a) Hard-to-control bugs that eat apples invade from Canada
b) Consumers find that apples cause cancer
c) Immigration laws change to permit more itinerant apple pickers to enter the country
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