Assignment 7.1

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Southern Columbia Hs *

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MISC

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Economics

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Nov 24, 2024

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Assignment 7. Note: Embedded extra credit: 105/100 points possible 1. List the assumptions/characteristics of a perfectly competitive market. (20 points) When Dealing with a perfectly competitive market ten things come to mind right away in order for it to be seen as a perfectly competitive market. These things are a large number of buyers and sellers because if there was only one single buyer then it is a very small organization. A Homogeneous product which means that the goods and services are identical in quality and the features are not different from any product. The organization needs to have perfect knowledge of the product. Ease of entry and exit with the organization that way the profits will attract new organizations and firms. Free entry and exit of the firms as well. The competitive market also needs to have features of perfect competition meaning that the organization or firm must represent what they are trying to compete against or selling. The competive market must have identical goods due to the fact that the organization can set the price and enter and exit without the barriers that are bestowed, the buyers as well have full information upon the product, within the market other organizations that sell same product the market share does not influence price and the companies cannot determine the said price. Transport cost are the price that transports the goods by the transportation companies. The transportation is paid by the organization that uses them. Finally, complete information the buyers and sellers must know what they are buying, the organization sets the price for the product but the company are the ones selling it and the companies can’t determine the price. This is why it is important to have these ten factors within the competitive market. Large number of buyers and sellers Homogeneous product Perfect Knowledge Ease of entry and exit Free entry or exit of the firm or organization Knowing the features of perfect competition Identical goods Complete information of buying and selling with the companies and the organization

2. Give the equation for a firm’s breakeven point. (5 points) This formula is as follows: It is Fixed Costs divided by (Price-Variable Costs) This equals out to the Breakeven Point Fixed Costs/(Price-Variable Costs)=Breakeven Point 3. Give the equation/inequality for a firm’s shutdown point. (5 points) So the firm is shutting down because the total revenue which can be represented at TR is less then what the actual variable cost is. The equation or inequality can be TR<TVC. One can also figure it out by using P for price. And also having the Average Variable cost inputted as well. Therefore the equation can be P<AVC The firm can keep going as long as they are making revenue and it is greater or equal to the average variable cost. If it stays equal then the firm will continue but if in this equation as stated above if it falls below the AVC then the firm will have to shut down. Another way to do so is also compare the total revenue as said above to the total variable costs. The fixed costs plus the variable costs equal the total variable costs. FC+VC= TVC Add up all the revenue. Say Revenue is 5,000,000 for the organization. The FC is 2,500,00 and the Variable cost is 1,500,000 2,500,000+1,500,000= 4,000,000

In this case R>AVC The 5,000,000 is greater than the 4,000,000 it should stay running however again as stated above, if it is less it should shut down. That is how to figure the shutdown point. Answer the questions following each scenario. 4. A firm in a perfectly competitive market has total revenue of $300,000, fixed costs of $200,000, and variable costs of $200,000. Determine the short-run (produce or shut down) and long-run (remain in or leave the market) decisions of the firm. What is the long-run outcome in the market if all firms within the market are identical (Is there entry or exit? What happens to market price?)? (25 points) The short run one can see that the total cost combing the fixed costs and the variable cost is 400,000. The revenue is only 300,000. The organization is losing money not making it. Revenue is down. Again, this organization overall is losing money 100,000 to be exact. Therefore as stated in question three with the formula it should in fact shut down. Why stay running when it is a loss. The long run being that this economic hardship of losing 100,000 is costing the organization losses. The long run is to leave the market while it still can and have at least somewhat profit from earnings before or from previous months. Continuing to lose money will be hurtful and cause damage. The firm is using the 400,000 to make the product which is costing the firm in the long run. The opportunity cost is hurting the organization overall. I see no other choice but to exit out of this because losing money on a product is not generating revenue. In fact it is costing the organization revenue, when the organization or firm leaves there will be a demand in the public because the product is now gone and the price of the product is going to go higher than usual. If the rules were reversed and the organization was in fact making profit and their revenue was higher than the AVC, then the supply would be higher due to the fact that profit is being made and more items are selling the quantity is bigger however, the market price on shelf decreases with this in mind if that was the case the firm would be going strong and continue to thrive for the future. So if I had a pair of shoes that I had and sold them for 25 dollar, it only cost me ten to make them, I have a fifteen dollar profit. People are wanting to buy more shoes because they are on sale and now I have to produce more, however, in order for me to continue and make even in the long run, I will have to continue to have my organization do this until it evens out for the long run if I fail behind. Meaning, I was before losing the 1,000,000 I would if I stay in the long run increase the market price until I get back on

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track with equaling out what my costs were. However, in a competitive market with research and such organizations or firms earn zero revenue in the long run or future as one is trying to play catch up and thus it is always decreasing and increasing upon prices. 5. A firm in a perfectly competitive market faces a price of $8. It currently has an average variable cost of $4 and an average fixed cost of $2. Determine the short-run (produce or shut down) and long-run (remain in or leave the market) decisions of the firm. What is the long-run outcome in the market if all firms within the market are identical (Is there entry or exit? What happens to market price?)? (25 points) As stated above, firms and organizations seem be the main topic of the question if it should shut down or stay into business. As seen we know that the revenue has to be greater then the AVC if it is then it stays open if not it closes. With that being said, we are given that the revenue eight times the amount of what it produces with the numbers. In this case, the firm's total revenue is given by $8 times the quantity of output it produces. Since the firm's average variable cost is $4, its total variable cost is $4 times the quantity of output. We have 8 dollars One has to take the eight dollars and times it by the quantity of the item. 8 * Q One also has to take the four and two into consideration. 4+2=6 6= AVC Take the six by the quantity of item as well. 6 * Q The firm has to have the formula of revenue in this case be 8 * Q > 6 * Q In other words the revenue has to be greater than the Total Variable cost. Which the revenue from this is 2.

Another factor to consider is that the quantity of the item. In order for the organization to continue covering its expenses Q>1. This means that the organization must make one product it being a pair of shoes for example even though those aren’t the real price just throwing it out there to cover their costs within the short run. Thus, if they are receiving revenue and are able to sustain the fact of the total costs then this is the organization’s plan for the short run. The long run will be based again upon what is happening. In this case, since the organization is slowly earning profit within the long run, then this opens up more other organizations and firms to join within the perfect economic structure market. In reality in the real world, all market and organizations firms share competition in the competitive market. If I had a product from a firm and the firm is making profit others will join and again this increases the quantity of the items. Therefore again as before price goes down if a firm shuts down, then the price for other firms for the product of identical likes will go up because the demand is high. It is all about the supply and demand curve that happens. Some firms may exit and some firms may enter it. It goes back to the fifth question as stated above where a firm may enter the market again by lowing their items from a loss before and finally meet at the even point where the organization or firm was before. Therefore, this is the reason why the economic world is always having firms enter and exit within the market. The one time something different happens is when all firms have reached their points of where the minimum and total costs equals the point of their revenue cost and therefore no firm wants to exit or enter the market. Until it shifts again then it is time to make the moves which happens often than not. When every firm is on the equal plane then all firms are on a long run equilibrium line that equals out across the board where the product price is the same, supply and demand are at a steady rate and it is about to shift again later down the road as well. We shall see. 6. At its current level of production, a firm in a perfectly competitive market faces a marginal cost of $8 and an average cost of $8. What is the current market price? What will this firm do in the short run and what will it do in the long run? If all firms in the market are identical, will there be entry or exit? What will the long-run market price be? (25 points) So eight seems to be the magic number here. The short run the firm will continue over time to produce the product. This is due to the fact that the price of the current product is equal of the Average Variable costs that we were given. We also know that the marginal run price is eight as well. Lots of eights in this one. Again though if the actual price raises up to twelve dollars, then it is time to exit out as the firm is losing money. The current price again is the magic number eight.

Now it brings us to the next question of the firms or organizations being identical. If the market price goes up to 12 dollars and the AC price is still eight dollars then new firms will want in on that action seeing it as an opportunity to get back on track and make profit. Again, if the price drops as stated above then firms will leave. As stated in the previous questions above if we are in a perfect economic world in which the marginal price is the same then the long run price will be eight dollars still and of course on both ends of the there will be no exit or entry within the organizations. This is what is called marginal equilibrium where nothing moves decreases and increases and other factors. Here eight is the magic number upon these firms.

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Assignment 7.1

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