Microeconomics
ISCTE - University Institute of Business and Social Sciences
Review and practice exercises: Theoretical class 6
Key concepts
Price-taking firm
Profit maximisation
Shut-down
Firm’s supply curve
Perfect competition
Basic hypothesis of the model
Average revenue and marginal revenue
Equilibrium in the long run
Take-home exercise
A firm faces economies of scale up to a given level of production and
diseconomies of scale thereafter. Its long term average cost curve is:
a) positively sloped;
b) negatively sloped;
c) flat;
d) U-shaped.
Problem set
1. A price taking company of prices possesses a productive process
characterized by the following cost functions:
CF = 50 (fixed cost),
CV = Q3 - 5 Q2 + 56Q (variable cost).
a) Find the supply function of the company.
b) Assuming that the market price is €50, find the amount of output that
corresponds to its maximum profit and how much is that profit.
c) In accordance to results above, which move should the company make?
d) If for any reason (e.g. the outcome of US elections) the market price
lowered to €40, which situation would the company be in?
2. Consider a market operating in a regime of perfect competition. There are 40
consumers, each one having an identical demand curve:
qd = 11.25 - 0.5P.
The market supply function is: Qs = 270 + 10P.
The cost function of a typical company which operates in this market is:
CT = 1,33q3 - 8q2 + 13q + 5.
a) Find the market equilibrium.
b) Calculate the supply function of the typical company.
c) Calculate the optimal amount of output and the corresponding profit for
the typical company.
d) Calculate the market share of each company.
3*. Now assume that, due to liberalization of international trade, the market price
of the good started in now €2.
a) What are consequences for the average firm? (production plan, profit and
market share).
b) Do you believe this situation will hold for a long time? Give suggestions
that may improve the situation.
4. There are to companies, A and the B, in the same perfectly competitive marke.
Their long run total cost curves are the following ones:
CTLPA = 15q - 6q2 + q3
CTLPB = 4q - 3q2 + q3
a) Determine the expression of the supply curves in the long run for each of
the firms
b) Represent graphically both situations.
c) Comment the situation of each one of the companies in terms of the
likelihood of survival in the market and in terms of their cost structure.