Question

1. Use the graph below of a perfectly competitive market. How many units will the firm choose to sell, and at what price? In the short term, what will be the total revenue, total cost, and total profit of the firm? If at some point in the future the market price fell below $6 (for example where Point A is) what would the firm do?

2. Jeff produces table lamps in the perfectly competitive desk lamp market.

• Fill in the missing values in the following table.
• Suppose the equilibrium price in the desk lamp market is $50. How many table lamps should Jeff produce, and how much profit will he make?
• If next week the equilibrium price of desk lamps drops to $30, should Jeff shut down? Explain.

Output / Week	Total Cost	AFC	AVC	ATC	MC
0	$100
1	$150
2	$175
3	$190
4	$210
5	$240
6	$280
7	$330
8	$390
9	$460
10	$540

Answer 1

Output	TC	FC	VC	AFC	AVC	ATC	MC
0	100	100	0
1	150	100	50	100.00	50.00	150.00	50
2	175	100	75	50.00	37.50	87.50	25
3	190	100	90	33.33	30.00	63.33	15
4	210	100	110	25.00	27.50	52.50	20
5	240	100	140	20.00	28.00	48.00	30
6	280	100	180	16.67	30.00	46.67	40
7	330	100	230	14.29	32.86	47.14	50
8	390	100	290	12.50	36.25	48.75	60
9	460	100	360	11.11	40.00	51.11	70
10	540	100	440	10.00	44.00	54.00	80

FC=100

VC=TC-FC

AFC=FC/Q

AVC=VC/Q

ATC=TC/Q

MC=change in TC/Change in Q

When the Price is $50 then setting P=MC, the firm will sell 7 units.

When the Price is $30 then setting P=MC, Jeff will still produce because P>AVC of $28 at 5 units so he will continue to produce as long as he is able to cover his variable costs,