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Assignment no 4
Period: From Wednesday 14th March to Sunday 18th March 2012 Market Structure
With reference to Managerial Economics chapter 8 solve following problem

Perfect competition
1. Explain the market characteristics of perfect competition. The potato market in the short run Farmer Anders Sand grows his potatoes on a farm in the middle of Jutland. This is one of the main production areas in Denmark. Even though there is a lot of different species and types of potatoes, we assume in the following that we can focus on just one kind of potato, which we call HUGO, and that HUGO represent all potatoes of quality class 1. The farmers take care of preparing the soil, planting, hoeing and harvesting the potatoes. When it comes to sorting and packing the potatoes the farmers typically leave this to a cooperative unit, which also takes care of the sale. The cooperative units sell the potatoes to greengrocers, supermarkets and other food stores, who then again sell the potatoes to the Danes, and all Danes eat a lot of potatoes. In spite of this, we will also assume that there are a lot of buyers and sellers in the potato market. 2. Under the assumption that the market can be considered as a market with perfect completion which might not be quite right you are asked to determine price and quantity in the short run. The supply and demand functions for HUGO are Supply: PS = 0.001Q + 8 Demand: PD = -0.001Q + 32 Where P = price of HUGO in DKK per bag of 5 kilogram, and Q = the demanded quantity sold in bags of 5 kilograms per day. The potato grower in the short run. 3. Calculate P, TR and MR in the short run for HUGO for potato farmer Anders Sand.

Production costs and sales of HUGO in the short run are complex, but Anders Sand has estimated his TCfunction as TC = 0.001Q3 0.175Q2 + 18Q + 300

Where TC = Total cost in DKK per day, and Q = sold quantity of 5 kilograms bags per day. 4. Determine the cost functions TC, TFC, TVC, ATC, AFC, AVC, and MC with algebra, table and figure.


5. Calculate best quantity Q in bags of 5 kilograms per day for HUGO under the assumption that potato grower Anders Sand wants maximum daily profit. Determine the optimum or the best price with algebra, table and figure. Calculate also the profit in DKK per day and the contribution margin in DKK per day. 6. Draw Anders Sands supply curve for HUGO. Long-Run analysis The answer to question 5 above shows that the potato grower in the short run earns a profit, which is above normal return on investment. He is making economic profits. 7. How will the market adjust to the long run situation? What will happen to the number of potato growers in the long run? How will the supply curve shift? 8. Assuming the supply curve in the long run for HUGO is P= 0.001Q calculate best price and quantity.

The potato grower in the long run The answer to question 8 shows an optimum price, which exactly is the price in the long run that pays a zero economic profit, because a long run normal profit is included in the LTC curve. The potato grower has estimated that marginal cost in the long run for HUGO is LMC = 0.0063Q2 0.75Q + 30

9. Find the best quantity, Q Optimum, in the long run for HUGO. Draw the optimum in a figure.