As highlighted in this week’s Learning Resources, typical firms in perfectly competitive markets will find the optimal ways to use and allocate their resources to be as efficient as possible and achieve success in the long run. In part, this outcome is due to the nature of firm cost functions and their influence on output and pricing decisions related to profit maximization. For example, if there are two vegetable sellers at a farmer’s market, they may not be able to compete with each other in price because of how low the prices are already. However, if one seller has to hire help to grow the vegetables and the other has found a more efficient way to grow them without help, then that other seller will likely be able to stay in business longer because there are no payroll expenses.
In this Assignment, you will address concepts of cost structure and perfectly competitive markets, including the relationship between a typical firm’s cost functions and its pricing and output decisions.
To prepare for this Assignment:
- Review this week’s Learning Resources, in particular the material on firm and industry cost functions.
- Refer to the Academic Writing Expectations for 1000-Level Courses as you compose your Assignment.
By Day 7
Submit your responses to the following prompts.
- Using the definition and characteristics of perfectly competitive industries, explain why—in the long run—firms earn zero economic profits. Does this mean that competitive firms earn zero accounting profits? Your response should be at least 75–150 words (1–2 paragraphs) in length.
- Joe’s Widget Factory operates in a perfectly competitive industry. Joe’s fixed and variable costs are given in the table below. He is a price taker and can sell as many widgets as he produces for $10 each. Complete the table using the provided link and respond to the following questions. Besides referring to your table to support your answers, include references from the course materials on profit maximizing rules for competitive firms. Your response should be at least 75–150 words (1–2 paragraphs) in length, including table.
- What is the profit maximizing (or loss minimizing) level of output in the short run?
- What is the profit maximizing level of output in the long run?
- What are the shut-down prices in the short run and long run?
- What is the firm’s supply curve?
- Note: Use this Week 3 Assignment Worksheet to complete the following table. Be sure to incorporate your table into your Assignment submission.
Widgets ProducedFixed CostsVariable CostsTotal CostsAverage Variable CostAverage Total CostMarginal CostPrice = MRProfits0250 10 1258 10 22515 10 32523 10 42532 10 52542 10 62553 10 72565 10 82578 10 92592 10
- Based on your answers to the previous set of questions, assuming there are 100 identical firms in the widget industry, construct a table showing the industry supply curve. Then, explain what you expect will happen over time to the number of firms in the industry and the equilibrium industry price of widgets. Your response should be at least 75–150 words (1–2 paragraphs) in length, including the table.
Note: For each prompt, be sure to reference at least one scholarly source to support your answer. Use the Walden Undergraduate Paper Template, provided in this week’s Learning Resources, to complete this Assignment.