# Perfect Competition Practice Problems ```U3 Business Calculus Practice FRQs
1. Bob’s lawn mowing service is a profit-maximizing competitive firm. Bob mows lawns for \$27 each. His
total cost each day is \$280, of which \$30 is a fixed cost. He mows 10 lawns a day. What can you say
about Bob’s short-run decision regarding shut down and his long-run decision regarding exit?
2. Consider total cost and total revenue given the following table:
Quantity
0
1
2
3
4
5
6
7
Total Cost
\$8
9
10
11
13
19
27
37
Total Revenue
\$0
8
16
24
32
40
48
56
a. How many units should this firm produce?
b. Is this firm a perfectly competitive firm? How do you know?
c. Is the industry in long-run equilibrium?
d. Using the table above, determine the long-run equilibrium price.
3. Callahan’s Orchard grows apples and operates in a constant-cost, perfectly competitive apple industry.
Callahan’s Orchard is currently in long-run equilibrium.
a. Draw correctly labeled side-by-side graphs for the apple market and Callahan’s Orchard, and
show each of the following.
i.
Market output and price, labeled as “QM” and “PM”, respectively
ii.
Callahan’s output and price, labeled as “QF” and “PF”, respectively
b. Now assume that the government provides farm support to apple growers by granting an annual
lump-sum subsidy (hint: there’s a difference between a lump-sum subsidy and a per-unit
subsidy and this will affect your answer) to all apple growers. Indicate the effect the subsidy
would have on each of the following in the short run.
i.
Callahan’s quantity of output. Explain.
ii.
Callahan’s profit
iii.
The number of firms in the industry
c. Indicate how each of the following will change in the long run as a result of the lump-sum
subsidy.
i.
The number of firms in the industry. Explain.
ii.
Price
iii.
Industry output
4.
Assume that corn is produced in a perfectly competitive market. Farmer Roy is a typical producer of
corn.
a. Assume that Farmer Roy is making zero economic profit in the short run. Draw a correctly
labeled side-by-side graph for the corn market and for Farmer Roy and show each of the
following.
i.
The equilibrium price and quantity for the corn market, labeled as PM1 and QM1,
respectively
ii.
The equilibrium quantity for Farmer Roy, labeled as QF1
b. For Farmer Roy’s corn, is the demand perfectly elastic, perfectly inelastic, relatively elastic,
relatively inelastic, or unit elastic? Explain.
c. Corn can be used as an input in the production of ethanol. The demand for ethanol has
significantly increased.
i.
Show on your graph in part (a) the effect of the increase in demand for ethanol on the
market price and quantity of corn in the short run, labeling the new equilibrium price and
quantity as PM2 and QM2, respectively.
ii.
Show on your graph in part (a) the effect of the increase in demand for ethanol on
Farmer Roy’s quantity of corn in the short run, labeling the quantity as QF2.
iii.
How does the average total cost for Farmer Roy at QF2 compare with PM2?
d. Corn is also used as an input in the production of cereal. What is the effect of the increased
demand for ethanol on the equilibrium price and quantity in the cereal market in the short run?
Explain.
5. Suppose that roses are produced in a perfectly competitive, increasing-cost industry in long-run
equilibrium with identical firms.
a. Draw correctly labeled side-by-side graphs for the rose industry and a typical firm and show
each of the following.
i.
Industry equilibrium price and quantity, labeled Pm and Qm, respectively
ii.
The firm’s equilibrium price and quantity, labeled Pf and Qf , respectively
b. Is P​
m​ larger than, smaller than, or equal to P​
f​ ?
c. Assume that there is an increase in the demand for roses. On your graphs in part (a), show
each of the following.
i.
The new short-run industry equilibrium price and quantity, labeled P​m2​ and Q​
m2​,
respectively
ii.
The new short-run profit-maximizing price and quantity for the typical firm, labeled P​
f2
and Q​f2​, respectively
d. As the industry adjusts to a new long-run equilibrium,
i.
what will happen to the number of firms in the industry? Explain.
ii.
will the firm’s average total cost curve shift upward, shift downward, or remain
unchanged?
e. In the long run, compare the firm’s profit-maximizing price in each of the following.
i.
P​f​ in part (a)(ii)
ii.
P​f2​ in part (c)(ii)
6. Tori is a producer of palm trees in a perfectly competitive market that is currently in long-term
equilibrium at the price of \$50. At equilibrium quantity of 100 trees, Tori’s average variable cost per tree
is \$35.
a. Draw a graph for both the industry and Tony’s firm (include MR, MC, ATC, and AVC). (4 points)
i.
Label the area of Tony’s Total Revenue (1 point)
ii.
Label the area of Total Cost (1 point)
iii.
Label the shutdown point. (1 point)
b. Describe Tony’s firm in terms of the following:
i.
Productive efficiency (1 Point)
ii.
Allocative efficiency (1 point)
c. With side-by-side graphs, show the results of an increase in demand for palm trees and identify
what happens to the following in the short-run. (2 points)
i.
Price for Tony’s firm. (1 point)
ii.
Quantity for Tony’s firm. (1 point)
7. Assume that apples are an inferior good. Draw a perfectly competitive market for apples and a firm
selling apples in long-run equilibrium where price is \$10 and the firm’s equilibrium quantity is 50.
Explain the following situations graphically and in words (draw and label side-by-side graphs for each).
(4 points)
a. GRAPH and EXPLAIN what happens in the short-run if incomes increase by 15%. (2 points)
b. GRAPH and EXPLAIN the process by which markets return to the long-run equilibrium. (2
points)
8. La Lecheria, a typical profit-maximizing dairy firm, is operating in a constant-cost, perfectly competitive
industry in long-run equilibrium.
a. Draw correctly labeled side-by-side graphs for the dairy market and for La Lecheria and show
each of the following:
i.
Price and output for the industry (2 points)
ii.
Price and output for Bestmilk (2 points)
b. Assume that milk is a normal good and that consumer income falls. Assume that La Lecheria
continues to produce. On your graphs in part (a), show the effect of the decrease in income on
each of the following in the short run.
i.
Price and output for the industry
ii.
Price and output for Bestmilk
iii.
Area of profit or loss for Bestmilk
c. Following the decrease in consumer income, what must be true for La Lecheria to continue to
produce in the short run?
d. Assume that the industry adjusts to a new long-run equilibrium. Compare the following between
the initial and the new long-run equilibrium.
i.
Price in the industry
ii.
Output of a typical firm
iii.
The number of firms in the dairy industry
9. Below is information regarding Cory’s Surfboard Inc. Complete the table and do the following:
a. On a large graph, plot the MC, AFC, AVC, and ATC curves from this data​.
b. EXPLAIN what would happen to each of Cory’s per unit cost curves if the price of Styrofoam
blanks (a variable input) increases. How would the cost curves change if there were an increase
in his rent (a fixed input)? Explain why the results are different.
c. If the market for surfboards was perfectly competitive and the market price was \$150, how many
surfboards should Cory make and how much profit will he make for EACH surfboard? Draw the
d. Label Productive efficiency and Allocative efficiency
Total
Product
0
1
2
3
4
5
6
7
Variable
Costs
(TVC)
\$0
60
90
130
180
250
340
490
Total Cost
(TC)
\$100
Average Fixed
Cost (AFC)
Average
Variable Cost
(AVC)
Average Total
Cost (ATC)
Marginal
Cost (MC)
8
680
10. A commercial fisherman notices the following relationship between hours spent fishing and the quantity
of fish caught.
Hours
Fish (lbs.)
TP
MP
AP
FC
VC
TC
0
1
2
3
4
5
a. What is the MP of each hour spent fishing?
b. Graph: Total Product (TP), Marginal Product (MP), Average Product (AP)
c. The fisherman has a fixed cost of \$10 (his pole). His opportunity cost is \$5/hr. Complete the
table and graph his FC, TC, and VC curves.
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