Use the following table to answer the questions that follow 8. Use the following

Question

Use the following table to answer the questions that follow

8. Use the following table to answer the questions that follow it. QATC AVCAFC 1$13.00 $8.00 $8.00 $5.50 $5.00 $2.50 $6.00 $4.33 $1.67 S1.25 $1.00 S0.83 S0.71 8 $5.38$4.75 S0.63 9 $5.67 $5.11S0.56 S0.50 4 5 | $5.00 $4.00 $5.00 $4.17 7 $5.14 $4.43 10 $6.00 $5.50 a. If the perfectly competitive firm faces a market price of $7.50, the firm should produce b. If the price falls below $ , the firm should shut down c. If the perfectly competitive firm faces a market price of $4.50, it should produce units for a (profit/loss) of $ units for a (profit/loss) of $

Explanation / Answer

(a)

A perfectly competitive firm is a price taker.

In order to maximize profit, a perfectly competitive firm produces that level of output corresponding to which price equals marginal cost.

If there is no explicit output at which price equals MC then firm produces upto that level of output corresponding to which price is greater than MC.

If the market price is $7.50 then given table shows that price would be greater than MC upto production of 8 units.

So, firm will produce 8 units.

Calculate Total Revenue -

TR = Price * Quantity = $7.50 * 8 = $60

When 8 units are produced, ATC is $5.38

Calculate the Total Cost -

Total cost = ATC * Quantity = $5.38 * 8 = $43.04

Calculate the Profit -

Profit = TR - TC = $60 - $43.04 = $16.96

The profit is $16.96

Thus,

If the perfectly competitive firm faces a market price of $7.50, the firm should produce 8 units for a profit of $16.96.

(b)

A firm shuts down if the price falls below minimum AVC.

The given table shows that minimum AVC is $4.

So,

If the price falls below $4, the firm should shut down.

(c)

A perfectly competitive firm is a price taker.

In order to maximize profit, a perfectly competitive firm produces that level of output corresponding to which price equals marginal cost.

If there is no explicit output at which price equals MC then firm produces upto that level of output corresponding to which price is greater than MC.

If the market price is $4.50 then given table shows that price would be greater than MC upto production of 5 units.

So, firm will produce 5 units.

Calculate Total Revenue -

TR = Price * Quantity = $4.50 * 5 = $22.50

When 5 units are produced, ATC is $5

Calculate the Total Cost -

Total cost = ATC * Quantity = $5 * 5 = $25

Calculate the Profit -

Profit = TR - TC = $22.50 - $25 = -$2.50

Negative profit implies loss.

So, there is loss of $2.50

Thus,

If the perfectly competitive firm faces a market price of $4.50, the firm should produce 5 units for a loss of $2.50.

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