Market Equilibrium and Profit Maximization under Perfect Competition
The supply and demand equations for a hypothetical perfectly competitive market are given by
QS = -100 + 3P and QD = 500 - 2P.
a) Find the market equilibrium price algebraically.
b) In Excel, use the above equilibrium price and the cost data from the following table to determine the
firm's optimal output and its profit or loss.
c) For each of the following changes in market conditions, find the new market equilibrium and assess
the impact on the firm's output and profit. Determine whether the firm should operate or
shut down in the short run. Plot the solutions. (Treat each change-scenario independently.)
i) To each firm, government provides $40 subsidy per unit of output produced.
ii) The firm's AVC rises by $20 at each level of output due to an increase in material costs.
iii) Market demand increases, changing the original demand equation to: QD = 600 - 2P.
Total fixed variable
Output cost cost
0 $100 $ 0
1 100 100
2 100 180
3 100 240
4 100 320
5 100 440
6 100 600
7 100 800
8 100 1040
9 100 1340
10 100 1800
Market Equilibrium and Profit Maximization under Perfect Competition are dissected.