The short run variable costs below are for a firm in a perfectly competitive mar
ID: 1191021 • Letter: T
Question
The short run variable costs below are for a firm in a perfectly competitive market. All firms producing this good have the same costs. The demand is the market demand for the good this firm produces
FIRM MARKET DEMAND
Q VC P Q P Q
1 12 10 500 19 320
2 21 11 480 20 300
3 31 12 460 21 280
4 43 13 440 22 260
5 58 14 420 23 240
6 78 15 400 24 220
7 105 16 380 25 200
8 140 17 360 26 180
18 340 27 160
Find the quantity this firm will produce in the short run if the price of output is $20. If $20 is the short run competitive equilibrium price, find the number of firms in the market.
Explanation / Answer
In a perfectly competitive market a firm will produce that output at which the market Price of the product and the marginal cost of the firm get equated.
So, in this case, we need to find the marginal cost for the concerned firm in our question. Here, for this firm, there is no fixed cost, so there is no problem in finding the total cost; that is, the total cost will be same as the variable cost only.
The change in the total or variable cost for 1 unit change in the output will give us the marginal cost. So, we can compute the marginal cost for the firm as follows—
Q
VC or TC
MC = /VC//Q
1
12
12
2
21
9
3
31
10
4
43
12
5
58
15
6
78
20
7
105
27
8
140
35
Now this firm will attain competitive equilibrium, when P = MC took place.
The competitive price is given as, P = $20.
From the above table we can observe that the MC is $20 for Q = 6.
So, the optimum quantity for the firm is 6 units.
Now from the market demand schedule, we see that, at price (P) = $20, the total quantity produced is 300 units.
We know that every firm is identical in cost structure as was described by the above table, so we can say that each of the firm will produce 6 units of output at their equilibrium level.
Therefore, each of the firm produces 6 units of output to meet the market demand of 300 units. So, the total number of firms in the market is, (300/6) = 50.
Q
VC or TC
MC = /VC//Q
1
12
12
2
21
9
3
31
10
4
43
12
5
58
15
6
78
20
7
105
27
8
140
35
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