Chapter 9 Project

Perfect Competition

Purpose

In this chapter, you learned the characteristics of perfect competition and the advantages of productive and allocative efficiencies that occur in the long run in a perfectly competitive industry. You also determined how perfectly competitive firms make short-run decisions that will maximize profits, minimize losses, or close the business down.

The purpose of this exercise is first, to determine if businesses that you encounter on a daily basis are perfectly competitive, and second, to understand how perfectly competitive business and industries make short-run and long-run decisions.

Directions

This exercise has two parts. In the first, you will examine products that you buy often and determine if they come from a perfectly competitive industry. In the second, you will make short-run and long-run production decisions for a perfectly competitive business.

Part 1 - Identifying Perfect Competition

  1. List ten goods or services that you buy frequently. Are these products from a perfectly competitive industry? Based on the characteristics of perfect competition, why or why not?

Part 2 - Short-Run and Long-Run Production Decisions

Suppose that the following table represents the industry demand and supply for all-day rafting trips down a river in a large state park. Assume that there are 100 firms in this perfectly competitive industry, each with identical costs.

Price Quantity Demanded Quantity Supplied Beginning Quantity Supplied Ending
$ ⁢ 350 200 600 (blank)
$ ⁢ 300 300 500 (blank)
$ ⁢ 250 400 400 (blank)
$ ⁢ 200 500 300 (blank)

  1. What is the equilibrium price and quantity in the rafting industry?

Each of the 100 firms in the industry has fixed costs of $ ⁢ 100 a day for equipment, including rafts, helmets, and life jackets. Their variable costs are for the wages of a guide that is needed in each raft and snacks for the rafters. Assume that the following table represents each firm's costs.

Output (trips/day) Variable Cost Total Cost Average Variable Cost Average Total Cost Marginal Cost
0 $ ⁢ 0 $ ⁢ 100 (blank) (blank) (blank)
1 $ ⁢ 200 $ ⁢ 300 $ ⁢ 200 $ ⁢ 300 $ ⁢ 200
2 $ ⁢ 360 $ ⁢ 460 $ ⁢ 180 $ ⁢ 230 $ ⁢ 160
3 $ ⁢ 500 $ ⁢ 600 $ ⁢ 167 $ ⁢ 200 $ ⁢ 140
4 $ ⁢ 750 $ ⁢ 850 $ ⁢ 188 $ ⁢ 213 $ ⁢ 250
5 $ ⁢ 1,050 $ ⁢ 1,150 $ ⁢ 210 $ ⁢ 230 $ ⁢ 300
6 $ ⁢ 1,400 $ ⁢ 1,500 $ ⁢ 233 $ ⁢ 250 $ ⁢ 350

  1. Given the market price determined at equilibrium in the industry, explain why each firm in the industry will take four trips per day at a price of $ ⁢ 250 . How much will each firm profit or lose at this output?

  2. What is the long-run equilibrium price for this industry?

  3. Explain the process through which the industry and each firm in the industry will reach the long-run equilibrium price.

  4. Estimate a reasonable short-run supply curve for the industry to complete the last column of the previous industry demand and supply table.

Checklist

Part 1

Part 2