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Sheet 4 Perfect Competition

The document outlines a series of problems related to microeconomic theory, specifically focusing on perfect competition and cost functions. It includes calculations for long-run equilibrium prices, quantities, and market dynamics for various cost functions and scenarios. Additionally, it features multiple-choice questions assessing understanding of long-run equilibrium in a competitive market.

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Sheet 4 Perfect Competition

The document outlines a series of problems related to microeconomic theory, specifically focusing on perfect competition and cost functions. It includes calculations for long-run equilibrium prices, quantities, and market dynamics for various cost functions and scenarios. Additionally, it features multiple-choice questions assessing understanding of long-run equilibrium in a competitive market.

Uploaded by

radwaahmedsamir11
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
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Faculty of Economics and Political Science

Microeconomic Theory (2)


Spring 2025
Dr Marian Atallah
TA: Noha Magdy

Sheet (4) Perfect Competition

1. Each firm in a competitive market has the same cost function of c(q). The market demand
function is Qd = 24 − p. Determine the long-run equilibrium price, quantity per firm, market
quantity and number of firms when

(a) c(q) = 16 + q2
(b) c(q) = q − q2 +q3

2. The bolt-making industry currently consists of 20 producers, all of whom operate with the
identical short- run total cost curves c(q) = 10+ q2 where q is the output of a firm. The market
demand for bolts is Qd = 110−p and the industry is perfectly competitive.

(a) What is the short-run supply curve of a firm?


(b) What is the short-run market supply curve?
(c) Determine the short-run equilibrium price and quantity in this industry.

3. Suppose that in a perfectly competitive market each firm has a long-run supply function c(q) = kq2,
where k > 0. Suppose also that the prevailing market price is p > 0. For what values of k and p does
this firm exit the market?

4. Suppose that in a perfectly competitive market each firm has a long-run marginal cost given by
MC(q) = 100 − 20q + 3q2, and a long-run average cost ATC(q) = 100 − 10q + q2. The market
demand is given by Qd = 22500 − 100p.

(a) What is the long-run competitive equilibrium price in this market?


(b) How many firms are in this market in a long-run competitive equilibrium?

5. Consider a competitive industry composed of J identical firms. Firms produce output according to

the Cobb-Douglas technology, q = xαk1−α, where x is some variable input such as labor, k is
some input such as plant size, which is fixed in the short run, and 0 < α < 1. At prices p, wx, and wk,
derive the expression for the output supply and the profit function.

1
6. Referring to the previous question, assume that alpha=1/2, wx=4, wk=1. Examine the long
equilibrium in the market and determine the price level where maximum profits are zero
along with the market clearing condition (QD=294/4)

2) MCQ:
1) The market for study desks is characterized by perfect competition. All firms are identical in
terms of their technological capabilities. Thus, the cost function as given below for a
representative firm can be assumed to be the cost function faced by each firm in the industry.
The total cost function for the representative firm is given by the following equations:

TC = 2Qs2 + 5Qs + 50;Qs represents firm supply


Suppose that the market demand is given by:
PD = 1025 - 2QD; Q represents market demand.
A. The long-run equilibrium price in this market is
a) 20
b) 25
c) 15
d) 10

B. The long-run output of each representative firm in this industry is


a) 20
b) 15
c) 5
d) 10

C. When this industry is in long-run equilibrium, the maximum number of firms in the industry is
a) 100
b) 500
c) 50
d) 2000

D. In the long-run, a representative firm in this industry earns …… economic profits.


a) Negative
b) Positive
c) Zero
d) None of the above

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