Assume that a purely competitive firm has the schedule of the average and margin

Question

Assume that a purely competitive firm has the schedule of the average and marginal costs given in the table below

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OUTPUT AFC AVC ATC MC

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1          $300 $100 $400 $100

2           150    75    225    50

3           100    70   170     60

4            75     73   148     80

5            60     80   140   110

6            50     90   140   140

7            43    103   146 180

8            38    119   156 230

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a. At a price of $68, the firm will produce _____ units of output. The firm's economic profit is ________.

b. At a price of $80, the firm will produce ______ units of output. The firm's economic profit is ______.

Will the firm break-even at this price? _____. If not, what will be this firm’s break-even price? ______.

Explain why. ______________________________________________________________________

c. At a price of $190, the firm will produce ________ units of output. Will $190 be the long run price for

this firm? _____ Explain your answer. _________________________________________________

If this is not the long run price, what will be the long run price? _____.

PLEASE DO ALL OF A-C IN DETAIL AND NEAT WORK

Explanation / Answer

a. When the price is $68, the firm will compare its marginal cost and will select a level of output at which MC is closest to the price but is less than it. This implies MC will be 60 and quantity will be 3 units of output. At this level, AVC is $70. This implies price is less than AVC. Hence, firm will not produce anything. Its economic profit will be the loss of fixed cost which is $300 when Q is 1.

b. When the price is $80, the firm will compare its marginal cost and will select a level of output at which MC is closest to the price but is less than it. This implies MC will be 80 and quantity will be 4 units of output. At this level, AVC is $73. This implies price is greater than AVC so firm will produce 4 units. Its economic profit is (P – ATC) = (80 – 148)*4 = -272. The firm is not breaking even because the price is less than the average cost. Now the break even price is 140 because at this price MC is 140 as well as ATC is 140. This implies economic profit is zero.

c. When the price is $190, the firm will compare its marginal cost and will select a level of output at which MC is closest to the price but is less than it. This implies MC will be 180 and quantity will be 7 units of output. This is not the long run price because in the long run average cost and marginal cost are equal whereas now at this price they are not same. The long run price is actually 140 because at this price MC = AC.

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