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# practice problem set3.pdf

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School
McGill University
Department
Economics (Arts)
Course
ECON 208
Professor
Wendy Dickinson
Semester
Summer

Description
Problem Set 3 Microeconomic Analysis & Applications { (ECON 208) Fall 2011 Week November 14 - November 18 Chapter 9: Competitive Markets 1 Pro▯t Maximization for a Competitive Firm Consider an individual ▯rm that is small relative to the industry in which it sells its product. The ▯rm’s technology is such that its marginal cost (in dollars) is given by: MC(q) = 1 + 5q (1) where q is the ▯rm’s level of output (measured in thousands of units per month). 1. Plot the ▯rm’s marginal cost curve. 2. Suppose that the ▯rm’s average variable costs are such that its shut-down price is \$6. Explain in general terms how the ▯rm can compute its shut-down price. 3. If the market price for the product is \$11, what is the ▯rm’s pro▯t-maximizing level of output per month? 4. If the market price for the product is \$14, what is the ▯rm’s pro▯t-maximizing level of output per month? 5. Explain why a competitive ▯rm’s supply curve is given by its MC curve. 2 What Determines Price? Read carefully the Additional Topic (found on MyEconLab) called The Long-Run Industry Supply Curve. A major theme of this chapter is the role that free entry and exit play in determining a competitive industry’s long-run equilibrium. Keeping this term in mind, think of the following statement: In Industry X, demand and supply do determine price in the short run, but in the long run, only supply matters. 1. Assuming that Industry X is a constant-cost industry, use a demand-and-supply diagram to illustrate why the statement is exactly correct. 2. Now, assuming that Industry X is an increasing-cost industry, show in a demand-and- supply diagram why the statement is not quite correct.
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