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? _____.

Explanation / Answer

a. At a price of $68, the firm will produce IN BETWEEN UNITS 3 AND 4( 3.4 units) units of output (P=MC). The firm's economic profit is -318.92 OR LOSS OF 318.92

economic profit= revenue - cost = P*Q -ATC*Q = 68*(3.4) -161.2*(3.4) = -318.92

b. At a price of $80, the firm will produce 4 units of output. The firm's economic profit is -272 ( LOSS OF 272

economic profit= revenue - cost = P*Q -ATC*Q =80*(4) -148*(4) = -272

Will the firm break-even at this price   NO    . If not, what will be this firm’s break-even price IS AT 6TH UNIT WHEN ATC IS MINIMUM AT ATC=MC BUT PRICE NEEDS TO BE EQUAL TO 140 , THEN ONLY BREAK EVEN POINT WILL BE ACHIEVED

Explain why. BREAK EVEN POINT IS ACHEIVED WHERE ATC IS MIN AND MC=ATC AND PRICE IN MARKET = ATC , THEREFOR FIRM EARNS NO PROFIT NO LOSS AT BREAK EVEN POINT.

c. At a price of $190, the firm will produce 7.25 units of output. Will $190 be the long run price for

this firm NO Explain your answer IN LONG RUN , PURELY COMPETITIVE FIRMS EARNS ONLY NORMAL PROFIT AND AT BREAK EVEN POINT WHERE P= MIN ATC= 140

If this is not the long run price, what will be the long run price? 140.

IN LONG RUN , PURELY COMPETITIVE FIRMS EARNS ONLY NORMAL PROFIT AND AT BREAK EVEN POINT WHERE P= MIN ATC= 140. LARGE NO OF FIRMS, SO THEY END UP WITH ONLY NORMAL PROFIT

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