Perfect Competition

Perfect Competition

Part a

1. Perfect competition vs. monopoly:

(a) What is the difference between the demand curve faced by a perfectly competitive firm and a perfectly competitive
industry and a monopolist firm?

(b) What is the difference between the total revenue curve faced by a perfectly competitive firm and a monopolist
firm? How about the marginal revenue curve?

2. Perfect Competition short-run and long-run:

Consider a competitive industry in which the market demand for the product is expressed as: P = 453−0.0032Q, and
the industry supply of the product is expressed as: P = 3 + 0.0018Q. The typical firm in this market has a marginal
cost of MC = 3+2.16q, where q is an individual firm’s output and Q is the industry or total market output.

(a) Determine the equilibrium market price and output. Calculate the consumer surplus and the producer surplus at
equilibrium in the industry.

(b) Determine the output of a typical firm in this industry, given your answer to part (a) above. How many firms are
there in the industry?

(c) If the industry demand were to increase to P = 483 − 0.0032Q, what would the new price and output in the
industry be in the short-run? What would the new output for a typical firm be? (Do not round up your answer.)

Part b

(d) If the original supply and demand (given before part a for this question) represented a long-run equilibrium
condition in the market (assuming constant cost industry), would the new equilibrium in part (c) represent a new
long-run equilibrium for the typical firm? Explain.

(e) Suppose the only long-run adjustment is free entry or exit of firms. To be in the long-run equilibrium with the
new increased demand, how many firms would enter into or leave from the industry?

3. What is the Lerner’s index of market power? How do we measure it?

4. Perfect competition vs. monopolistic competition:

(a) What is the difference between perfect competition and monopolistic competition?

(b) Suppose the only long-run adjustment is free entry or exit of firms. What is the difference between the short-run
equilibrium conditions faced by a perfectly competitive firm and a monopolistically competitive firm? How about
the long-run equilibrium conditions?

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