Exercises No.

(1) (a) Most of the doctors in town charge the same price (consultation fees) though there
are relatively few of them. Is the market competitive?
(b) Most manufacturers of woolens charge nearly the same price. Is this an indication
that the market is competitive?
© There are several markets in every town which sell nearly the same daily household
requirements. However, they charge different prices for the same item. Can we therefore
say that the market is not competitive?

(2) Glassworks Inc., claims that the reason for not producing upto capacity levels is the
shortage of market for its products in a competitive environment and not the
unremunerative price in the current market. Examine whether Glassworks is competitive.

(3) A cycle company operates in a competitive market. It incurred a fixed cost of 600000
on plant and design. The useful life of the fixed inputs is 10 years. The variable cost per
cycle is approximately 4.4 Y.5 if Y cycles are produced. Find the short run supply curve
of the firm.

(4) A small steel plant produces a popular variety of stainless steel and is known to
operate in a highly competitive environment. It incurred an initial investment of 750000
on plant and machinery with 10 years life expectancy. It is estimated that the marginal
product of labor on this machine is L-.5, and that the annual maintenance costs (in
thousands) for Y units of output are Y3 - 5Y2 + 4Y. The wages paid per worker is 8000
per year. Find the short run supply curve and the short run capacity of the firm.

(5) An industry consists of nearly 100 competitive firms. For Y in excess of 5 units, the
average cost of production of a typical firm is given by AC = 25 + 2Y. The market
demand curve is given by p = 675 - Y.
(a) Find the supply curve of each firm.
(b) Find the market supply curve.
(c) Find the equilibrium price level.

(6) The short run cost curve of a firm is

STC = 1.44 Y2 + (1-2x1) + x12
The current price in the competitive market is 14 and the firm has chosen x1 = 5.
(a) What will be its short run choice of Y?
(b) Assuming that the same price persists in the long run what will be the choice of x1?
(c) How can we ascertain whether this price will prevail in the long run or not?

(7) The total demand in a competitive market is given by

3pm = 321 - Ym
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Each of the firms in this market has a long run average cost curve given by
LAC = y2 - 6Y + 12
Determine the number of firms in this market in the long run.

(8) Consider a competitive market in which the total cost curve of each of the firms is
given by
STC = Y3 - 2Y2 + (5 - 2x1)Y + x12
where Y = output of each of the firms, and x1 = size of the fixed factor.
The market demand curve is
pm = 152.75 - 0.5Ym
where Ym = total quantity of output demanded on the market at a price pm pe unit of Y.
Determine the number of firms in this market in the long run equilibrium.

(9) It is a biological fact that the availability of eggs increases in winter. And yet the
price of eggs goes up. How do you explain this?

(10) Consider two markets, namely, the apple market and the orange market.
(a) What will happen to the price of apples if there is an outbreak of an apple disease?
(b) What remedial action can you suggest if we want to encourage production of more
apples?

(11) The demand and supply curves for a particular market are given by
Yt = 100 - pt, and Yt = - 50 + 2pt-1
respectively.
(a) Find the long run equilibrium price.
(b) Find the short run equilibrium price.
(c) Is the long run equilibrium stable?

(12) Consider the stability of long run competitive equilibrium given the following
disequilibrium response of the firms in the market.
(a) dY / dt = - a(p - p*)
dp / dt = b(Y - Y*)
a, b > 0
(b) dY / dt = a(Y - Y*)
dp / dt = b(p - p*)
a > 0, b < 0

(13) Meltron Inc., produces a consumer durable Y and a variable input x2 required for its
production. The production of both Y and x2 also require a common machine x1. Let x1
be measured in terms of the number of hours of machine time available per week. The
following information is given.

(i) The production of 1 unit of Y requires 2 units of x1 and 1 unit of x2.

(ii) The production of 1 unit of x2 requires 1 unit of x1 and another variable factor
purchased on the market. The total cost of the variable factor is given by
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TVC (x2) = x22.

(iii) The total machine time (x1) available for the production of Y and x2 is 30 hours per
week.
(iv) The demand for Y is
p = 100 - Y
where p = market price per unit of Y.
(v) The general manager defines the transfer prices
q1 = rental charged per unit of machine time (x1) from both the x2 and Y divisions, and
q2 = transfer price per unit of x2.
(vi) The managers of the divisions producing x2 and Y make decisions with respect to
their output independently. Both of them have been instructed by the general manager to
maximize the profits of their respective divisions.
Calculate the following.
(a) The demand for x1 by the x2 and Y divisions as functions of q1 and q2.
(b) The x2 demanded by the Y division as a function of q2.
(c) The x2 supplied by the x2 division.
(d) The transfer prices q1 and q2.

(14) Consider a competitive market in which the short run total cost curve of each of the
firms is given by
TC(Y,X1) = (X1 +1) +Y2[1+(1/X1)]
The market demand curve is
Pm = 250 - Ym
where Ym = total quantity of output demanded on the market at a price pm per unit of Y.
Determine the number of firms in the market in competitive long run equilibrium.

(15) On a tropical island there are 100 boat builders numbered 1 through 100. Each
builder can build up to 12 boats a year and each builder maximizes its profits given the
market price. Let y denote the number of boats built per year by a particular builder, and
suppose builder 1 has a cost function C9y) = 11 + y, builder 2 has a cost function C(y)
== 11 + 2y, etc. That is, for each I, from 1 to 100, boat builder I has a cost function C(y)
== 11 + iy. Assume that the fixed cost of Rs. 11 is paid only if the firm produces a
positive level of output. If the price of a boat is 25, how many builders will choose to
produce a positive amount of output? What is the total output?