Week six

Chapter 7, Technical Questions 3 and 5 in the textbook.

5. Draw graphs showing a perfectly competitive firm

and industry in long-run equilibrium.

A. How do you know that the industry is in longrun

equilibrium?

B. Suppose that there is an increase in demand for

this product. Show and explain the short-run

adjustment process for both the firm and the

industry.

C. Show and explain the long-run adjustment process

for both the firm and the industry. What

will happen to the number of firms in the new

long-run equilibrium?

Chapter 7, Application Question 5 in the textbook.

5. In a perfectly competitive industry, the market

price is $25. A firm is currently producing 10,000

units of output, its average total cost is $28, its

marginal cost is $20, and its average variable cost

is $20. Given these facts, explain whether the following

statements are true or false:

a. The firm is currently producing at the minimum

average variable cost.

b. The firm should produce more output to maximize

its profit.

c. Average total cost will be less than $28 at the

level of output that maximizes the firm’s

profit.

Hint: You should assume normal U-shaped cost

curves for this problem.

Chapter 8, Technical Questions 3 and 7 in the textbook.

3. Suppose the demand curve for a monopolist is

QD = 500 − P, and the marginal revenue function

is MR = 500 − 2Q. The monopolist has a constant

marginal and average total cost of $50 per unit.

a. Find the monopolist’s profit-maximizing output

and price.

b. Calculate the monopolist’s profit.

c. What is the Lerner Index for this industry?