7. Assume that the most efficient production technology available for making vit

Question

7. Assume that the most efficient production technology available for making vitamin pills has the cost structure given in the following table. Note that output is measured as the number of bottles of vitamins produced per day and that costs include a normal profit Output 25,000 50,000 75,000 100,000 TC S100,000 150,000 187,500 275,000 MC S0.50 1.00 2.50 3.00 a. What is ATC per unit for each level of output listed in the table? Output 25,000 50,000 75,000 100,000 TC $100,000 150,000 187,500 275,500 MC $0.50 1.00 2.50 3.00 ATC b. Is this a decreasing-cost industry? c. Suppose that the market price for a bottle of vitamins is $2.50 and that at that price the total market quantity demanded is 75,000,000 bottles. How many firms will there be in this industry? firm(s) d. Suppose that, instead, the market quantity demanded at a price of $2.50 is only 75,000. How many firms do you expect there to be in this industry? firm(s) . Review your answers to parts b, c, and d. Does the level of demand determine this industry's market structure?

Explanation / Answer

a)

ATC = TC /Q => 100000 / 25000 = 4

b) No, this industry is not a decreasing-cost industry . because as the output increase, the firm atc is increased.

c) total market quantity demanded is 75,000,000 . and P = 2.5. so in long run equilbruim the firm only produce to the quantity where price equal to average total cost. therefore one firm only produce 75000. therefore total number of frims in the market = 75000000/75000 = 1000

so there are 1000 firms in the industry.

d) when Q =75000. . then there is only one firm in the industry.

ATC

ATC = TC /Q => 100000 / 25000 = 4

3 2.5 2.75

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