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PROBLEM SET # 5 ECON 1006EL-01

Chapter 5: The Supply Side of the Market

1. Describe the distinguishing characteristics of a perfectly competitive market vis--vis imperfectly competitive markets. 2. 3. Explain why a firm in a competitive market must behave like a pricetaker. Show that for price-taking firm P = MR = AR. Describe the law of diminishing marginal productivity of the variable factor (Labour) in the short run and its implication for the marginal cost curve of the firm. In the short-run, with the stock of capital held constant, the marginal and the average productivity schedules of labour exhibit a technologically fixed relationship. Describe this relationship in words. Graphically illustrate this relationship. PL and then MPL explain why the competitive firms short run MC curve has a U shape. Define marginal cost (MC) of output. Show that MC = PL and APL then explain why the competitive firms short run AVC curve has a U shape. Define average variable cost (AVC) of output. Show that AVC = Explain why a competitive firms short-run profits will be at the maximum when the firm extends output to the point where P = MC. Carefully define a competitive firms short-run supply curve. Explain why the competitive firms short-run supply curve slopes upward. Why does the competitive firms short-run shut-down point occur at the price P = AVCMin ? Explain your answer.

4.

5.

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7. 8. 9.

Use the figure showing the family of short-run cost curves of a competitive firm to answer questions 10-14. Costs

MC

ATC
5.55 4.60 4.00 3.50 3.00 2.80

AVC P3 P2 P1 P0

c b a
d

40 50

65

80

Q Quantity

10

Suppose the market price is p = 5.55. At this price what is the firms short run profitmaximizing Output or supply = Total revenue = Total Cost = Total Variable Cost = Total Fixed Cost = Total Profits =

11.

If the market price persist at price p = 5.55, explain how this competitive industry will adjust to the long run equilibrium state. Describe the key feature of this long run equilibrium state.

12. Suppose the market price is p = 3.00. At this price what is the firms short run profitmaximizing Output or supply = Total revenue =

Total Cost = Total Variable Cost = Total Fixed Cost = Total Profits = 13. 14. 15. Suppose the market price persist at a level slightly higher than P = 3.00, how will resource allocation change in this industry in the long run? Explain your answer. Explain why the price level P = 3.00 is called the short-run shut down price level for the competitive firm. Explain how will each of the following affect the competitive firms MC and AC curves: a. An increase in the price of labour. b. An improvement in technology c. An increase in the price of capital