Answer to Question #219695 in Microeconomics for Romeo

Question

1.   The structure of a market is determined by certain characteristics such as the number of buys and sellers, long-run profits, nature of demand curve, possibility of collusion e.t.c.

(a)    Use the characteristics of a perfectly competitive market to explainwhy the demand curve for a firm in perfectly competitive market is perfectly elastic.

(b)   Mathematically prove that for an market structure, the profitmaximizing level of output is obtained at the point where the marginal cost is equal to marginal revenue i.e. MC = MR.

(c)    if TC = 3 + Q² and demand is.

Calculate the firm’s total profit.

Answer 1

Imagine when you sell a widget on an open market with slew of other individuals offering precisely similar product in the same price. Ideally, there is no person who will purchase from you when you set a higher price compared to others. Each person will purchase from you when you choose your price to be below that. Based on the idea, you will confront horizontal demand curve for the widget at a price which every person has set. That is know to be a perfectly horizontal demand curve.

This analogy tends to capture assumptions underpinning perfect competition. Customers do not pay such costs, as there are several perfect substitutes for respective widget. This is never associated with consumer tastes, despite the idea that it is a demand curve which is defined by perfect substitutes availability that ordinarily needs the aggregation of customer's tastes to weigh.