Handout 9 Perfect Competition – Profit Maximization This handout contains exercises of - Profit Maximization in Perfectly Competitive Market Things you should know - What are the characteristics of firms in perfectly competitive market? - How to find the firm’s behavior and quantity to produce that maximizes its profit? Exercises Question 1 (Perfectly Competitive Market) Which of the following is most likely considered a typical firm in a perfectly competitive industry? a) Apple Corporation b) A wheat farmer in Wisconsin c) University of Wisconsin d) Ian’s Pizza Question 2 (Profit Maximization) cost Suppose the fixed cost is $60. In this perfectly competitive industry, if the market price of this product is currently $20, each profit-maximizing firm will produce ________ units and earn an economic profit of ________. a) 12 / $60 b) 2 / - $100 c) 0 / - $60 d) 15 / $150 ATC MC 70 50 30 20 15 10 2 3 4 10 12 15 16 20 q Question 3 (Profit Maximization) Consider the following information table regarding costs of production. Quantity Fixed Cost ($) Variable Cost ($) 0 12 0 1 24 2 32 3 48 4 68 5 108 6 168 1. If the market price is $40, this firm should produce _______ units to maximize its profits, which is _______. 2. If the market price is $20, this firm should produce ________ units to maximize its profits, which is ________. 3. If the market price is $16, this firm should produce ________ units to maximize its profits, which is ________. 4. If the market price is $8, this firm should produce _______ units to maximize its profits, which is _______. 1 Question 4 (Profit Maximization – Equation Format) Consider the following production cost information of a firm. Total cost: TC = q2 + 2q + 40 Marginal cost: MC = 2q + 2 Average cost: AC = q + 2 + 40/q 1. What is the amount of fixed cost experienced by this firm? a) 2 b) 10 c) 40 d) Not enough information to determine the fixed cost. 2. If the market price is $42 and this firm is currently producing 30 units of good, this firm should ________. This firm is earning or could be earning the maximum profits of _______. a) decrease the quantity produced to maximize its profit / $480 b) increase the quantity produced to maximize its profit / $1260 c) maintain the quantity produced as it has already maximized its profit /$260 d) decrease the quantity produced to maximize its profit / $360 2