Answers to Workshop 6Perfect Competitionand Monopoly1.It is usual to divide markets into four categories. In ascending order of competitiveness these are (fill in the missing three):1. Monopoly2. Oligopoly3. Monopolistic competition4. Perfect competition2.To which of the above four categories do the following apply to the member firms? (There can be more than one market category in each case.)(a) Firms face a downward sloping demand curve. Monopoly, oligopoly, monopolistic competition(b)New firms can freely enter the industry. Perfect competition, monopolistic competition(c)Firms produce a homogeneous product. Perfect competition, some oligopolies(d)Firms are price takers. Perfect competition(e)Firms face an elastic demand (but less than infinity) at the profit-maximising output.Monopoly, oligopoly, monopolistic competition(f)Firms will produce where MR = MC if they wish to maximise profits. All(g)There is perfect knowledge on the part of consumers of price and product quality.Perfect competition3. In which of the four categories would you place each of the following? (It is possible in some cases that part of the industry could be in one category and part in another: if so name both.)(a)A village post officeMonopoly for certain people and products(b)Restaurants in large town Monopolistic competition(c)BanksOligopoly(d)Hi-fi manufacturers Oligopoly(e)Producers of barley Perfect competition (or close to it)(f)Water supply Monopoly(g)Local buses Monopoly or oligopoly(h)The market for foreign currency Perfect competition (or close to it)4.The following diagram shows the cost curves of a firm under perfect competition.(a)How much will the firm produce in order to maximise profits at a priceof £8 per unit?70 units(b)What will be its average cost of production at this output?£6(c)How much (supernormal) profit will it make?£2 ´ 70 = £140(d)How much will the firm produce in order to maximise profits at a priceof £5 per unit? 50 units(e)How much (supernormal) profit will it make?£0(f)How much will the firm produce in order to maximise profits at a priceof £4 per unit? 40 units(g)What will be its profit position now?A loss of £1.50 ´ 40 = £60(h)Below what price would the firm shut down in the short run?£3.50 (where P = AVC)(i)Below what price would the firm shut down in the long run?£5 (where P = AC)5.A monopolist is faced with the following cost and revenue curves:(a)What is the maximum-profit output? 200 units (where MC = MR)(b)What is the maximum-profit price?£60 (given by AR curve at 200 units)(c)What is the total revenue at this price and output?£12 000 (i.e. £60 ´ 200)(d)What is the total cost at this price and output?£6000 (i.e. £30 (AC) ´ 200)(e)What is the level of profit at this price and output?£6000 (i.e. TR TC)(f)If the monopolist were ordered to produce 300 units, what would be the market price?£50 (given by AR curve)(g)How much profit would now be made?£4500 (i.e. £15 ´ 300)(h)If the monopolist were faced with the same demand, but average costs were constant at £60 per unit, what output would maximise profit? 100 units (where AC = MC = MR = £60)(i)What would be the price now?£70 (given by AR curve at 100 units)(j)How much profit would now be made?£10 ´ 100 = £1000(k)Assume now that the monopolist decides not to maximise profits, but instead sets a price of £40. How much will now be sold? 400 units (given by AR curve)(l)What is the marginal revenue at this output? 0(m)What does the answer to (l) indicate about total revenue at a price of £40?Maximised(n)What is the price elasticity of demand at a price of £40? (You do not need to do a calculation to work this out: think about the relationship between MR and TR.)1 (this is the case where TR is maximised.6.You are given the following data about two firms:FIRM AQuantity0123456Total revenue (£)0102030405060Average revenue (£)101010101010Marginal revenue (£)101010101010Total cost (£)3042506076100140Marginal cost (£)12810162440Average cost (£)¥422520192023 FIRM BQuantity0123456Total cost (£)100134154177216266366Average cost (£)¥13477595453.2 61Marginal cost (£)3