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Directions: The following is a free response question released by the
College Board from a previous AP exam to be used as practice for future
exams. You can complete the assignment in this document, using the
drawing tools in Word (or any photo editing program) or print this
document, and complete the activity by hand, submitting a scan or photo
of your work. When you are done, submit the assignment for grading by
your instructor. This question will be graded out of 12 points.
1. J&P Company operates in a perfectly competitive market for smoke
alarms. J&P is currently earning short-run positive economic profits.
(a) Using correctly labeled side-by-side graphs for the smoke alarm
market and J&P Company, indicate each of the following for both
the market and the J&P Company.
(i) Price
(ii) Output

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sebastiansierraocm

Answer:

In a perfectly competitive market, J&P Company would be too small to have any influence in the price or output or the market. In other words, J&P Company would have no market power whatsoever.

Explanation:

For this reason, both price and output would be determined by exogenous variables to the company, namely, the forces of supply and demand, which in perfect competition can work without any interference, meaning that they produce the best outcome for society as a whole.

Demand is determined by consumers' willingness to pay, while supply is determined by marginal production costs. The point where supply and demand meet is the equilibrium price, at which supply and demand are equal.

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