Practice Sheet: Perfect competition.
1. A perfectly competitive firm sells its products for $300. Complete the table below. Find the
following: profit-maximizing price, profit-maximizing quantity, and greatest possible profit. Be sure
to use the profit-maximization condition to find the profit-maximizing quantity.
Q
P
TR
TC
0
100
1
200
2
400
3
700
4
1100
5
1600
6
2200
7
2900
Profit
MR
MC
2. An industry currently has 500 firms, each of which has fixed costs of Tk. 20 and marginal costs as
follows:
Quantity
Marginal cost (in Tk.)
1
20
2
15
3
12
4
15
5
20
6
26
7
32
a) Figure out the firm’s total cost, variable cost, average variable cost and average total cost for each
quantity.
b) The equilibrium price is currently Tk. 12. Given it is a perfectly competitive market, how much
does each firm produce?
c) At what price will the firm make normal profit? At what output will the firm decide to close down
their market? Show the answer in a diagram.
3. In a perfectly competitive market for pens, there are 100 identical producers. The market
price for pens is Tk.20 and all producers of pens must take this price. Each producer has the
following cost functions:
TC = 60 + 5Q + Q2
; MC = 5 + 2Q
Using this information, answer the following questions.
a) Find the profit maximizing level of output.
b) Calculate the level of profit in the short-run and illustrate accordingly.
c) Based on your answers of part (b) would the producer decide to shut down production in
the short run?
d) Explain the long-run adjustments that would occur in this market if the producers are
constantly making losses at the current equilibrium price.
4. A perfectly competitive firm has the following cost functions:
TC = 100 + 15Q + 0.5Q²
MC: 15+ Q
Market price P = 25
a) Calculate the profit-maximizing output (Q). ​
b) Determine whether the firm should produce or shut down in the short run.​
c) Calculate the firm’s short-run profit or loss.