1. Assume a firm under Perfect Competition in the Short Run. Answer each questio
ID: 1118819 • Letter: 1
Question
1. Assume a firm under Perfect Competition in the Short Run. Answer each question in terms of numerical values. MC ATC P, AVC P. P3 10 14 24 30 40 44 4762 6668 O Assume P1 = $20, P2+ $15, P3 = $12, and P4-$6 A. Suppose P1-$20, how much is the profit-maximizing quantity of output? How much are the profit per unit of output and total profit, respectively? (Assume ATC is $16 if output(Q) is 47.) B. Suppose P2-$15, how much are the profit-maximizing output and total profit, respectively? C. Suppose P3-$12, how much are the loss-minimizing output and the loss per unit of output, respectively? How much is total profit? (Assume ATC is $16 if output is 40.) In this case, should the firm produce the output even under the loss? D. Suppose minimum AVC= $8 at which output is 36. What is the firm's supply curve? Draw the supply curve of this firm E. Should the firm produce the output if P4 $6? Why or why not?
Explanation / Answer
A. For a perfectly competitive firm, P = MR and equilibrium is the point where MC intersects MR from below.
For P = 20, equilibrium output is 47. Profit per unit = P - ATC = 20 - 16 = 4
B. P2 = 15, Q = 44 and ATC = 44
Profit = 44 -44 = 0
C. P3 = 12, Q = 40 and ATC = 16
Profit = 12 - 16 = -4
Yes, firm should produce because Price is more than average variable cost. Firm is recovering his variable cost and fixed cost partly through production.
E. P4 = 6, Q = 30
Firm should shut down because he is making huge losses. Price is less than average variable cost and Loss is more than the fixed cost.
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