Cases

1.At a recent Board meeting, the president and

CEO got into a heated argument about whether
or not to shut down the firm’s plant in Miami
which faces perfect competition. The Miami
plant currently loses Rs 60,000 monthly. The
president argued that the plant should continue to
operate as the plant’s revenue is only Rs 20,000
and fixed costs are Rs. 68,000 per month. The
CEO exploded over this point as according to
him, “everyone knows fixed costs don’t matter”.

a. Should the Miami plant be closed down or

continue to operate at a loss in the short run?
b.How would you explain it graphically to the
incorrect party that he/she is wrong?
2.Interior Style faces perfect competition in its
state in interior designing. Initially it was not
doing well and could only cover its variable cost.
But with more consciousness among the higher
middle class people these days, the company
recently started to face an increase in demand.
Interior Style largely benefitted from this and
made huge money.

a. Explain how it has been possible for firms like

Interior Style to make huge money?

b.Do you think Interior Style can sustain the

huge profit in the long run, demand increasing
no further?
 Numericals

1.A new shop opens with the cost function

TC=1000+2Q+0.01Q2. If it follows perfect
competition and charges an average price of Rs
10, how much output should it produce to max
the profit?
In the short run, how much profit will it earn?

2.A lamp manufacturer faces a horizontal demand

curve. The firm’s TVC=150Q-20Q2+Q3. Below
what price should the firm shut down?

3.Market supply and demand functions for a

product is given as
Qd= 20000+30P, QS= 40000-20P
A perfectly comp firm produces this product
whose total cost is TC=1000+200Q+Q2.
Find the profit maximizing output for this firm?
4.A competitive firm has the following cost
function C = q3 – 8q2 + 30q + 5. Find out the
short run supply function of the firm.

5.A shoe manufacturer is operating in a perfectly

comp industry. The TC function is estimated to
be TC=200+300Q-40Q2+Q3. Industry supply
function for shoes is QS= 100+2P
If profit maximizing output is 50 units, find the
equilibrium output for the industry.

6.Long run AC function of a firm under perfect

competition is LAC=100-20Q+2Q2. If this is a
constant cost industry and the industry demand
function is P=100-0.1Q. How many firms are
there in the industry when the industry is at
equilibrium?