Assume that the following cost data are for a purely competitive producer Total

Question

Assume that the following cost data are for a purely competitive producer Total Product Average Fixed Average Average Total Marginal Cost Cost Variable Cost Cost 0.00 $ 0.00 60.005 45.00 5 105.00 45.0 S 60.00 S 30.00 S 2 S 30.004 50 4 42.50 $72 40.00 $ 40.00 3 |$ 20.00|$ 40.00-60.00-3500 37.00 49.0035.00 $ 10.00-37.50-47501 s 001 $ 35.00 $15.00 37.5052 52.50 S 12.00 $ 10.0037.50S 38.5747.14s 40.63 8.57$ 7.50 $ 6.67 43.33 50.0065.00 6.00 S 48.13 $ 55.00 10 46.50 $ 52.50 $ 5.00 Answer the questions in the first column in the table below for the price listed at the top of each of the other three c Instructions: If you are entering any negative numbers be sure to include a negative sign (-) in front of those num does not produce. At a product price of $56.00 At a product price of $41.00 Wi this firm produce in the short run? Click to select) (Click to select) Cick to selecty (Click to select) If it is preferable to produce, what will be the profit- maximizing or loss-minimizing output? output units output units per firm per firm 6

Explanation / Answer

a. A competitive firm produces output where the price equals the marginal cost.

A firm would continue to operate if the price covers the average variable cost. If the price is unable to cover the AVC then the firm would shut down.

Profit = total revenue (price * quantity) - total cost (ATC*Q).

d&e. An individual firm would produce output where the MC curve is lying above the AVC curve. Industry supply curve is the summation of all the individual supply curve. Qs 1500 = Qs * 1500.

Profit = total revenue - total cost.

f. Equilibrium is where the demand equals the supply.

This occurs at $46 price where the demand equals the supply at 10500 units.

Each firm produces = 10500/1500 = 7 units.

g. Loss, as the total cost exceeds the revenue earned at this equilibrium level.

Per unit loss = -7.98/7 = -$1.14

per firm = -$7.98

In the long run, the industry would CONTRACT as the firms would exit the industry as they incur a loss.

$56 $41 $32 Production in short run Yes Yes No Output 8 6 Not applicable Economic profit/loss Profit; $122.96 Loss; -$39 Loss; -$82

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