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CHAPTER 10
Pure Competition in the Short Run
A. Short-Answer, Essays, and Problems
1. Describe what is meant by market structure.
2. How does pure competition differ from other basic market models?
3. What are some examples of the four different market structures?
4. Compare and contrast the types of products produced across the four types of market structures, are they
5. For the list of products below explain which of the four different market structures best describes the
market.
6. What type of market best describes the exchange rate for currencies? Why?
7. What are four characteristics of pure competition?
8. Why can’t an individual firm raise its price by reducing output or lower its price to increase sales volume in
9. How would you describe the demand curve for the purely competitive firm? For the industry?
10. What is the difference between average, total, and marginal revenue? What is the shape of the total and
11. Why does price equal marginal revenue for the purely competitive firm? What is the relationship to the
12. Below is a demand schedule facing an individual firm. Complete the table by computing average revenue,
total revenue, and marginal revenue. Then answer the following two questions: (a) How can you tell
whether a firm is operating in a market that is purely competitive? (b) What relationship exists between
average revenue and marginal revenue?
Price
Quantity
demanded
Average
revenue
Total
revenue
Marginal
revenue
$30
0
$_____
$_____
—
30
1
_____
_____
$_____
30
2
_____
_____
_____
30
3
_____
_____
_____
30
4
_____
_____
_____
30
5
_____
_____
_____
30
6
_____
_____
_____
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13. An airline is flying between two cities. The airline has the following costs associated with the flight:
Crew $4000 Plane daily depreciation $2000
Fuel 1000 Plane daily insurance 2000
Landing fee 1000
14. Fill in the following table for a product in a purely competitive market. The market price for the good is
$32. Use the total revenue–total cost approach to evaluate at what quantity the firm can maximize its
profits.
Total
product
output
Total
fixed
cost
Total
variable
cost
Total
cost
Total
revenue
Profit / Loss
0
$50
$ 0
$_____
$_____
$_____
1
50
5
_____
_____
_____
2
50
15
_____
_____
_____
3
50
30
_____
_____
_____
4
50
50
_____
_____
_____
5
50
75
_____
_____
_____
6
50
105
_____
_____
_____
7
50
140
_____
_____
_____
8
50
185
_____
_____
_____
15. Use the graph below to identify: (a) break-even points; (b) the profit-maximizing level of output; and, (c)
letters showing largest difference between total revenue and total costs and the output level.
16. What conditions are necessary to determine if the purely competitive firm should produce in the short run?
17. What quantity should the purely competitive firm produce to maximize profits? Analyze from a total
18. Under what conditions will a purely competitive firm realize an economic profit? Give a response from a
19. Why is the level of output at which marginal revenue equals marginal cost the profit-maximizing output?
20. Suppose a bridge for automobiles was constructed across a river and all the costs associated with its
construction have been paid. The amount of traffic is such that there are no foreseeable problems of
overcrowding in the use of the bridge. Assume, also, that the extra cost associated with traffic crossing the
bridge is for all practical purposes equal to zero. What toll should be charged to achieve the most efficient
use of the bridge?
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21. Explain the marginal revenue and marginal cost approach to profit maximization and use it to describe
22. Tomato Farms is selling tomatoes in a purely competitive market. Its output is 5000 bushels, which sell for
$15 a bushel. At this level of output, the marginal cost is $15 a bushel and average total cost is $14.50 a
23. Good Grapes is selling grapes in a purely competitive market. Its output is 5000 pounds, which it sells for
$5 a pound. At the 5000-pound level of output, the average variable cost is $4.00, the marginal cost is
24. Doggy Treats is selling dog treats in a purely competitive market. Its output is 800 treats, which it sells for
$10 a treat. At the 800-treat level of output, the marginal cost is $11, the average variable cost is $9.00, and
25. Shazam, a maker of magic wands, is selling in a purely competitive market. Its output is 500 wands, which
sell for $10 each. At this level of output, the marginal cost is $10 and the average variable cost is $12.
27. Use the graph to answer these questions: (a) What is the profit-maximizing level of output? (b) What is
the economic profit? (c) What is the per-unit amount of profit at the profit-maximizing level of output? (d)
At what price would the firm decide to shut down?
28. (Consider This) Why might a business owner keep their business open but let it deteriorate, rather than
29. What is the relationship between marginal cost and the short-run supply curve for the purely competitive
30. Draw a graph of the short-run cost curves for a purely competitive firm that shows a short-run supply curve
for the individual firm. Identify the shutdown point, the break-even point, the profit-maximizing point, and
31. How will the marginal and average cost curves of the typical pure competitor shift or change as a result of
32. The agricultural market for corn can be characterized as a purely competitive industry. How might the
following events affect the short-run cost curves and output for a firm in the industry?
33. The market for milk can be characterized as a purely competitive industry. How might the following
events affect the short-run cost curves and output for a firm in the industry? Discuss how this will effect the
profit of the individual firm.
34. Assume a single firm in a purely competitive industry has variable costs as indicated in the following table
in column 2. Complete the table and answer the questions.
(1)
Total
product
(2)
Total
var. cost
(3)
Total
cost
(4)
AFC
(5)
AVC
(6)
ATC
(7)
MC
0
$ 0
$ 40
$_____
$_____
$_____
1
55
_____
_____
_____
_____
$_____
2
75
_____
_____
_____
_____
_____
3
90
_____
_____
_____
_____
_____
4
110
_____
_____
_____
_____
_____
5
135
_____
_____
_____
_____
_____
6
170
_____
_____
_____
_____
_____
7
220
_____
_____
_____
_____
_____
8
290
_____
_____
_____
_____
_____
35. Assume that a purely competitive firm has the schedule of costs given in the table below.
Output
TFC
TVC
TC
0
$500
$ 0
$ 500
1
500
150
650
2
500
200
700
3
500
260
760
4
500
340
840
5
500
450
950
6
500
590
1090
7
500
770
1270
8
500
1000
1500
9
500
1290
1790
10
500
1650
2150
36. Assume that a purely competitive firm has the schedule of average and marginal costs given in the table
below.
Output
AFC
AVC
ATC
MC
0
1
$600
$200
$800
$200
2
300
150
450
100
3
200
140
340
120
4
150
145
295
160
5
120
160
280
220
6
100
180
280
280
7
86
205
291
360
8
76
232
314
460
9
66
276
342
580
10
60
320
380
720
37. Assume that a purely competitive firm has the schedule of total fixed and total variable costs given in the
table below. Fill in the total cost column.
Output
TFC
TVC
TC
0
$500
$ 0
$_____
2
500
200
_____
4
500
340
_____
6
500
590
_____
8
500
1000
_____
10
500
1650
_____
B. Answers to Short-Answer, Essays, and Problems
1. Describe what is meant by market structure.
The market structure of an industry gives an ideal into the methods for which prices are determined,
whether it is through the market or a single seller, and the quantity of output produced. The market
2. How does pure competition differ from other basic market models?
3. What are some examples of the four different market structures?
4. Compare and contrast the types of products produced across the four types of market structures, are they
similar of differentiated.
5. For the list of products below explain which of the four different market structures best describes the
market.
(a) Tennis Shoes
(b) Wheat
(c) Cable Television
(d) Video Gaming Consoles
6. What type of market best describes the exchange rate for currencies? Why?
7. What are four characteristics of pure competition?
8. Why can’t an individual firm raise its price by reducing output or lower its price to increase sales volume in
a purely competitive market?
9. How would you describe the demand curve for the purely competitive firm? For the industry?
10. What is the difference between average, total, and marginal revenue? What is the shape of the total and
marginal revenue curves for the individual competitive firm?
11. Why does price equal marginal revenue for the purely competitive firm? What is the relationship to the
demand curve for the firm?
12. Below is a demand schedule facing an individual firm. Complete the table by computing average revenue,
total revenue, and marginal revenue. Then answer the following two questions: (a) How can you tell
whether a firm is operating in a market that is purely competitive? (b) What relationship exists between
average revenue and marginal revenue?
Price
Quantity
demanded
Average
revenue
Total
revenue
Marginal
revenue
$30
0
$_____
$_____
—
30
1
_____
_____
$_____
30
2
_____
_____
_____
30
3
_____
_____
_____
30
4
_____
_____
_____
30
5
_____
_____
_____
30
6
_____
_____
_____
Price
Quantity
demanded
Average
revenue
Total
revenue
Marginal
revenue
$30
0
$ 0
$ 0
—
30
1
30
30
$30
30
2
30
60
30
30
3
30
90
30
30
4
30
120
30
30
5
30
150
30
30
6
30
180
30
(a) The data indicate that the demand curve for this individual firm is perfectly elastic. Therefore, the firm
is operating in a purely competitive market because it can sell all of its output at the going market price
of $30. Product price is constant for the firm under pure competition.
(b) Marginal revenue and average revenue are the same under pure competition. Marginal revenue and
average revenue are also equal to price. Marginal revenue is constant under pure competition because
additional units can be sold at a constant price ($30). Because the seller must pay a constant amount
per unit ($30), the revenue per unit (or average revenue) is also equal to price.
13. An airline is flying between two cities. The airline has the following costs associated with the flight:
Crew $4000 Plane daily depreciation $2000
Fuel 1000 Plane daily insurance 2000
Landing fee 1000
The airline has an average of 40 passengers paying an average of $200 for this flight. Do you think the
airline should be flying between the two cities? Evaluate from a short-run perspective.
