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Chapter 6: Background to Supply: Firms in Competitive Markets: 6-8c Problems and Applications
Book Title: Economics
Printed By: Pablo Vazquez ([email protected])
© 2023 Cengage Learning EMEA, Cengage Learning EMEA

Chapter Review
6-8c Problems and Applications

1. What are the characteristics of a competitive market? Which of the following

drinks do you think is best described by these characteristics? Why are the
others not described by these characteristics?

a. tap water

b. bottled water

c. cola

d. beer.

2. Alejandro’s lawn mowing service is a profit maximizing, competitive firm.

Alejandro mows lawns for €27 each. His total cost each day is €280, of which
€30 is a fixed cost. He mows 10 lawns a day. What can you say about
Alejandro’s short-run decision regarding shutdown and his long-run decision
regarding exit?

3. Consider total cost and total revenue given in the table below:

Quantity 0 1 2 3 4 5 6 7

Total cost €8 9 10 11 13 19 27 37

Total revenue €0 8 16 24 32 40 48 56

a. Calculate profit for each quantity. How much should the firm produce to
maximize profit?

b. Calculate marginal revenue and marginal cost for each quantity. Graph
them. (Hint: put the points between whole numbers. For example, the
marginal cost between 2 and 3 should be graphed at ). At what
quantity do these curves cross? How does this relate to your answer to
part (a)?

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c. Can you tell whether this firm is in a competitive industry? If so, can you
tell whether the industry is in long-run equilibrium?

4. A profit-maximizing firm in a competitive market is currently producing 100

units of output. It has average revenue of €10, average total costs of €8 and
fixed costs of €200. What is the firm’s:

a. profit?

b. marginal cost?

c. average variable cost?

d. is the efficient scale of the firm more than, less than, or exactly 100
units?

5. Suppose the book printing industry is competitive and begins in long-run

equilibrium.

a. Draw a diagram describing the typical firm in the industry.

b. Hi-Tech Printing Company invents a new process that sharply reduces

the cost of printing books. What happens to Hi-Tech’s profits and the
price of books in the short run when Hi-Tech’s patent prevents other
firms from using the new technology?

c. What happens in the long run when the patent expires and other firms
are free to use the technology?

6. Isoquants are drawn as convex to the origin. Referring to the marginal rate of
technical substitution, why do you think that isoquants are convex to the
origin?

7. Look at the table of quantities below and sketch the isoquants implied by the
data for the output levels , and . On your graph, put
capital on the vertical axis and labour on the horizontal axis.

Capital
(Machine
hours per
day) Labour (person hours per day)

1 2 3 4 5

1 40 80 110 130 150

2 80 120 150 170 210

3 110 150 180 200 220

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Capital
(Machine
hours per
day) Labour (person hours per day)

4 130 170 200 220 230

5 150 180 210 230 240

8. Using the graph you have constructed for Question 7, calculate the marginal
rate of technical substitution for the output level when the firm moves
from a combination of 3 machine hours of capital and 1 person hour of labour,
to 1 machine hour of capital and 3 person hours of labour.

9. Given the total cost function , calculate the total cost for a
firm if it used the following combinations of capital and labour:

a. 5 units of capital and 8 units of labour

b. 10 units of labour and 3 units of capital

c. 7 units of capital and 12 units of labour.

10. Sketch a diagram to show a firm’s least-cost input combination. On your

diagram show what would happen to the firm’s optimum position if:

a. the price of capital increased but the price of labour stayed the same

b. the price of both labour and capital increased by the same amount

c. the price of labour and capital both increase but the price of capital
increases by a greater amount than the price of labour.

Chapter 6: Background to Supply: Firms in Competitive Markets: 6-8c Problems and Applications
Book Title: Economics
Printed By: Pablo Vazquez ([email protected])
© 2023 Cengage Learning EMEA, Cengage Learning EMEA

© 2024 Cengage Learning Inc. All rights reserved. No part of this work may by reproduced or used in any form or by any means -
graphic, electronic, or mechanical, or in any other manner - without the written permission of the copyright holder.

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