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Competitive markets are scrutinized.

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Exercise 1

XYZ Corporation operates in a perfectly competitive market. Due to robust economic growth XYZ corporation made above normal profits. Taking into account the characteristics of this market, explain what will happen to

ââ?¬¢ The number of firms in the market

ââ?¬¢ The market supply curve

ââ?¬¢ The market price and output level of products

ââ?¬¢ The profits of the firm

ââ?¬¢ The output produced by the firm

Exercise 2

XYZ Corporation operates in a market that produces a homogeneous good. The firm is a price taker and the market price of the product is $14. The firm is currently producing 52 units of output, marginal cost is $17, average total cost is $15 and average variable cost is $9.

a) Do you consider that the firm made a profit-maximizing decision? Explain why or why not.

b) If you answered no in question a, what operational decision should the manager of the firm make? Justify your answer.

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Solution Preview

1. Since firms are making higher profits,

a) Since there is no barrier to entry (because the market is competitive), everyone wants to make money, so they enter as new sellers. Number of firms increase

b) Obviously, when more firms enter, the supply increases. Supply curve shifts up.

c) More ...

Solution Summary

Competitive markets are scrutinized.