a. Suppose the market price is P = $300. Verify that the firm will enter the mar

Question

a. Suppose the market price is P = $300. Verify that the firm will enter the market and produce approximately 72 units.

b. Suppose that, after entering the market, the market price falls to $200. What will the firm do? Will it stay in the market or go out of business? And, if it stays in the market, will it keep its quantity at 72 or change it?

Units Produced Total Variable Cost 1 $198 2 $392 3 $583 4 $770 5 $953 6 $1,133 7 $1,311 8 $1,485 9 $1,656 10 $1,825 11 $1,991 12 $2,155 13 $2,317 14 $2,477 15 $2,634 16 $2,790 17 $2,945 18 $3,098 19 $3,249 20 $3,400 21 $3,550 22 $3,698 23 $3,846 24 $3,994 25 $4,141 26 $4,287 27 $4,434 28 $4,581 29 $4,728 30 $4,875 31 $5,023 32 $5,171 33 $5,320 34 $5,471 35 $5,622 36 $5,774 37 $5,928 38 $6,084 39 $6,241 40 $6,400 41 $6,561 42 $6,724 43 $6,890 44 $7,058 45 $7,228 46 $7,401 47 $7,578 48 $7,757 49 $7,939 50 $8,125 51 $8,314 52 $8,507 53 $8,704 54 $8,905 55 $9,109 56 $9,318 57 $9,532 58 $9,750 59 $9,972 60 $10,200 61 $10,433 62 $10,670 63 $10,913 64 $11,162 65 $11,416 66 $11,675 67 $11,941 68 $12,213 69 $12,491 70 $12,775 71 $13,066 72 $13,363 73 $13,667 74 $13,979 75 $14,297 76 $14,622 77 $14,955 78 $15,296 79 $15,644 80 $16,000 81 $16,364 82 $16,736 83 $17,117 84 $17,506 85 $17,903 86 $18,309 87 $18,725 88 $19,149 89 $19,582 90 $20,025 91 $20,477 92 $20,939 93 $21,411 94 $21,893 95 $22,384 96 $22,886 97 $23,399 98 $23,922 99 $24,455 100 $25,000

Explanation / Answer

(a) Firm will equate price with Marginal cost.

In absence of fixed cost data, we assume that TVC = total cost.

Then, marginal cost is closest to price when output is 72 units (MC = $297 = $13,363 - $13,066).

Therefore firm will produce about 72 units.

(b) When price falls to 200, firm will stay in business only if price > AVC, which holds true upto output level of 79 (At Q = 80, P = AVC).

So, the firm will choose that level of output below Q = 80, where it has maximum profit.

This happens at Q = 53 when Profit (= TR – TC) is highest at 1896.

Calculation table is as follows.

Q TVC MC AVC TR = P x Q MR Profit 1 198 198 200 2 2 392 194 196 400 200 8 3 583 191 194 600 200 17 4 770 187 193 800 200 30 5 953 183 191 1000 200 47 6 1,133 180 189 1200 200 67 7 1,311 178 187 1400 200 89 8 1,485 174 186 1600 200 115 9 1,656 171 184 1800 200 144 10 1,825 169 183 2000 200 175 11 1,991 166 181 2200 200 209 12 2,155 164 180 2400 200 245 13 2,317 162 178 2600 200 283 14 2,477 160 177 2800 200 323 15 2,634 157 176 3000 200 366 16 2,790 156 174 3200 200 410 17 2,945 155 173 3400 200 455 18 3,098 153 172 3600 200 502 19 3,249 151 171 3800 200 551 20 3,400 151 170 4000 200 600 21 3,550 150 169 4200 200 650 22 3,698 148 168 4400 200 702 23 3,846 148 167 4600 200 754 24 3,994 148 166 4800 200 806 25 4,141 147 166 5000 200 859 26 4,287 146 165 5200 200 913 27 4,434 147 164 5400 200 966 28 4,581 147 164 5600 200 1019 29 4,728 147 163 5800 200 1072 30 4,875 147 163 6000 200 1125 31 5,023 148 162 6200 200 1177 32 5,171 148 162 6400 200 1229 33 5,320 149 161 6600 200 1280 34 5,471 151 161 6800 200 1329 35 5,622 151 161 7000 200 1378 36 5,774 152 160 7200 200 1426 37 5,928 154 160 7400 200 1472 38 6,084 156 160 7600 200 1516 39 6,241 157 160 7800 200 1559 40 6,400 159 160 8000 200 1600 41 6,561 161 160 8200 200 1639 42 6,724 163 160 8400 200 1676 43 6,890 166 160 8600 200 1710 44 7,058 168 160 8800 200 1742 45 7,228 170 161 9000 200 1772 46 7,401 173 161 9200 200 1799 47 7,578 177 161 9400 200 1822 48 7,757 179 162 9600 200 1843 49 7,939 182 162 9800 200 1861 50 8,125 186 163 10000 200 1875 51 8,314 189 163 10200 200 1886 52 8,507 193 164 10400 200 1893 53 8,704 197 164 10600 200 1896 54 8,905 201 165 10800 200 1895 55 9,109 204 166 11000 200 1891 56 9,318 209 166 11200 200 1882 57 9,532 214 167 11400 200 1868 58 9,750 218 168 11600 200 1850 59 9,972 222 169 11800 200 1828 60 10,200 228 170 12000 200 1800 61 10,433 233 171 12200 200 1767 62 10,670 237 172 12400 200 1730 63 10,913 243 173 12600 200 1687 64 11,162 249 174 12800 200 1638 65 11,416 254 176 13000 200 1584 66 11,675 259 177 13200 200 1525 67 11,941 266 178 13400 200 1459 68 12,213 272 180 13600 200 1387 69 12,491 278 181 13800 200 1309 70 12,775 284 183 14000 200 1225 71 13,066 291 184 14200 200 1134 72 13,363 297 186 14400 200 1037 73 13,667 304 187 14600 200 933 74 13,979 312 189 14800 200 821 75 14,297 318 191 15000 200 703 76 14,622 325 192 15200 200 578 77 14,955 333 194 15400 200 445 78 15,296 341 196 15600 200 304 79 15,644 348 198 15800 200 156 80 16,000 356 200 16000 200 0 81 16,364 364 202 16200 200 -164 82 16,736 372 204 16400 200 -336 83 17,117 381 206 16600 200 -517 84 17,506 389 208 16800 200 -706 85 17,903 397 211 17000 200 -903 86 18,309 406 213 17200 200 -1109 87 18,725 416 215 17400 200 -1325 88 19,149 424 218 17600 200 -1549 89 19,582 433 220 17800 200 -1782 90 20,025 443 223 18000 200 -2025 91 20,477 452 225 18200 200 -2277 92 20,939 462 228 18400 200 -2539 93 21,411 472 230 18600 200 -2811 94 21,893 482 233 18800 200 -3093 95 22,384 491 236 19000 200 -3384 96 22,886 502 238 19200 200 -3686 97 23,399 513 241 19400 200 -3999 98 23,922 523 244 19600 200 -4322 99 24,455 533 247 19800 200 -4655 100 25,000 545 250 20000 200 -5000

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