Words: 562
Assignment #2 Mariela Silvestri Olga Drepina Managerial Economics and Globalization October, 31st, 2011. Assignment 2 Office building maintenance plans call for the stripping, waxing, and buffing of ceramic floor tiles. This work is contracted out to office maintenance firms, and both technology and labor requirements are very basic. Supply and demand conditions in this perfectly competitive service market in New York are: QS = 2P – 20| (Supply)| | | QD = 80 – 2P| (Demand)| – Where Q is thousands of hours of floor reconditioning per month, and P is the price per hour.
A. | Algebraically determine the market equilibrium price/output combination. | | 2P -20 = 80-2P| | | 2P + 2P = 80 + 20| | | 4P = 100| | | | P = 25| | | | | | | | Qs = 2(25) – 20 | Qd = 80 – 2(25)| Qs = 50 – 20| Qd = 80 – 50| Qs = 30| | Qd = 30| | | | | | Qs = Qd = Qe | | | | | | B. Use a graph to confirm your answers. For the graph, use: Prices: 10, 20,30,40,50,60,70,80,90 Quantities:5,10,15,20,25,30,35,40,45,50,55,60,65 | | | Thousands of hours/ month| Price/hour| Qs| Qd| Q| P| Supply| Demand| 10| 10| 0| 60| 5| 20| 20| 40| 20| 30| 40| 20| 25| 40| 60| 0| 30| 50| 80| 0| 35| 60| 100| 0| 40| 70| 120| 0| 45| 80| 140| 0| 50| 90| 160| 0| | The figure below shows a firm in a perfectly competitive market: a. Find the price below which the firm will go out of business. The shutdown point is the point at which the price equals minimum average variable cost. In the short run the company will be out of business if the price goes below P2; because if the price falls further, the firm does not even cover its variable costs if it operates.
Its loss if it operated thus exceeds the loss of shutting down and so the firm shuts down. In the short run, in a perfectly competitive market firms can earn an economic profit. If the market price of a perfectly competitive firm’s product is below its average variable cost, then the firm’s total revenue if it stayed open would be less than its total variable costs. When marginal revenue equals marginal cost, the firm is maximizing its profit. As long as it does not shut down, a perfectly competitive firm will produce so that marginal revenue equals marginal cost. . What is the firm’s long run supply curve? The supply curve for a perfectly competitive firm is the portion of its marginal cost curve that lies above the average variable cost curve. In the long run, new firms will enter a perfectly competitive market if they can earn an economic profit. The increased supply causes the price to fall. The firm’s long supply curve is the MC curve from point c to point d because at this point the firm will maximize the revenue at the higher quantity in dollars of price and costs. The empirical evidence on economies of scale showed that the long-run average cost curve tends to be relatively flat for many firms when looking at both single plants and multiplant operations. This means that there is no single optimal size firm in these industries in terms of minimizing the units cost of production” (Paul, 2010) As long as an economic profit exists, new firms continue to enter, and the price continues to fall until eventually the economic profit equals zero.
In the long run, firms leave a perfectly competitive market if they are suffering an economic loss. By exiting, the price rises and the economic loss of the surviving firms shrinks. Eventually enough firms exit so that the price rises to the point that the survivors no longer incur an economic loss, earning instead a normal profit. References Paul, F. (2010). Economics for Managers. New York: Pearson Learning Solutions.