Assume the following costs for an average firm who sells his output in a Perfect
ID: 1194950 • Letter: A
Question
Assume the following costs for an average firm who sells his output in a Perfectly Competitive Market:
Can you show me the math on how to get the answers for the questions below?
a)If the market price is $35, at what quantity should this firm produce in the short run?
b)Answer part a if the market price is $45.
c)Answer part a if the market price is $55.
d)Complete the short run supply schedule for the firm.
e)Complete the short run supply schedule for the entire industry.
f)What will be the market equilibrium price? What will be the market equilibrium quantity?
g)What price will the average firm charge? What quantity will the average produce?
h)What will be the short run economic profit/loss for the firm?
i)In the long run will firms enter or leave the market?
Explanation / Answer
Firm’s marginal cost schedule:
Q
Total cost ($)
Marginal cost (MC) ($)
0
60
0
1
105
105 – 60 = 45
2
145
145 – 105 = 40
3
180
180 – 145 = 35
4
210
210 – 180 = 30
5
245
245 – 210 = 35
6
285
285 – 245 = 40
7
330
330 – 285 = 45
8
385
385 – 330 = 55
9
450
450 – 385 = 65
10
525
525 – 450 = 75
An individual firm should produce that quantity (Q) where MC = MR = Price, and MC curve cuts MR or price from behind and goes upward.
a.
At $35 price, MC is equal to $35 for 5 quantities, and upward moving. Therefore, the firm should produce 5 quantities of output.
b.
At $45 price, MC is equal to $45 for 7 quantities, and upward moving. Therefore, the firm should produce 7 quantities of output.
c.
At $55 price, MC is equal to $55 for 8 quantities, and upward moving. Therefore, the firm should produce 8 quantities of output.
d.
Short-run supply schedule of the firm:
Price ($)
Quantity supply (equals the quantity of corresponding MC of upward moving)
35
5
40
6
45
7
55
8
65
9
75
10
Q
Total cost ($)
Marginal cost (MC) ($)
0
60
0
1
105
105 – 60 = 45
2
145
145 – 105 = 40
3
180
180 – 145 = 35
4
210
210 – 180 = 30
5
245
245 – 210 = 35
6
285
285 – 245 = 40
7
330
330 – 285 = 45
8
385
385 – 330 = 55
9
450
450 – 385 = 65
10
525
525 – 450 = 75
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