Assume the following cost data are for a purely competitive producer: Total Prod
ID: 1197079 • Letter: A
Question
Assume the following cost data are for a purely competitive producer:
Total
Product
Average
fixed
cost
Average
variable
cost
Average
total
cost
Marginal
Cost
0
1
2
3
4
5
6
7
8
9
10
$60.00
30.00
20.00
15.00
12.00
10.00
8.57
7.50
6.67
6.00
$45.00
42.50
40.00
37.50
37.00
37.50
38.57
40.63
43.33
46.50
$105.00
72.50
60.00
52.50
49.00
47.50
47.14
48.13
50.00
52.50
$45
40
35
30
35
40
45
55
65
75
a. At a product price of $56, will this firm produce in the short run? Why or why not? If it is preferable to produce, what will be the profitmaximizing or lossminimizing output? Explain. What economic profit or loss will the firm realize per unit of output?
b. Answer the relevant questions of 3a assuming product price is $41. (Repeat a w/ P=$41)
c. Answer the relevant questions of 3a assuming product price is $32. (Repeat a w/ P=$32)
d. In the table below, complete the shortrun supply schedule for the firm (columns 1 and 2) and indicate the profit or loss incurred at each output (column 3).
(1)
Price
(2)
Quantity
supplied,
single firm
(3)
Profit (+)
or loss (l)
(4)
Quantity
supplied,
1500 firms
$26
32
38
41
46
56
66
____
____
____
____
____
____
____
$____
____
____
____
____
____
____
____
____
____
____
____
____
____
e. Explain: “That segment of a competitive firm’s marginalcost curve which lies above its averagevariablecost curve constitutes the shortrun supply curve for the firm.” Illustrate graphically. How does this curve relate to the law of diminishing returns (Chapter 6)?
f. Now assume there are 1500 identical firms in this competitive industry; that is, there are 1500 firms, each of which has the same cost data as shown here. Calculate the industry supply schedule (column 4).
g. Suppose the market demand data for the product are as follows:
Price
Total
quantity
demanded
$26
32
38
41
46
56
66
17,000
15,000
13,500
12,000
10,500
9,500
8,000
What will be the equilibrium price? What will be the equilibrium output for the industry? For each firm? What will profit or loss be per unit? Per firm? Will this industry expand or contract in the long run?
Total
Product
Average
fixed
cost
Average
variable
cost
Average
total
cost
Marginal
Cost
0
1
2
3
4
5
6
7
8
9
10
$60.00
30.00
20.00
15.00
12.00
10.00
8.57
7.50
6.67
6.00
$45.00
42.50
40.00
37.50
37.00
37.50
38.57
40.63
43.33
46.50
$105.00
72.50
60.00
52.50
49.00
47.50
47.14
48.13
50.00
52.50
$45
40
35
30
35
40
45
55
65
75
Explanation / Answer
Using the MR = MC
it will produce 8 units.
Profits per unit = ($56 - $48.13)=$7.87
total profit = $62.96.
Using the MR = MC
it will produce 6 units.
Loss per unit or output = $41 - $47.50=$6
Total loss = $39 (= 6 * $6.50), which is less than its total fixed cost of $60.
(c) No, because $32 is always less than AVC. If it did produce according to the MR = MC rule, its output would be 4. By producing 4 units, it would lose $82 [= 4 ($32 - $52.50)]. By not producing, it would lose only its total fixed cost of $60.
(d) Column (2) data, top to bottom: 0; 0; 5; 6; 7; 8; 9, Column (3) data, top to bottom in dollars: -60; -60; -55; -39; -8; +63; +144.
(e) The firm will not produce if P < AVC.
When P > AVC, the firm will produce in the short run at the quantity where P (= MR) is equal to its increasing MC.
Therefore, the MC curve above the AVC curve is the firm’s short-run supply curve, it shows the quantity of output the firm will supply at each price level. See Figure 21.6 for a graphical illustration.
(f) Column (4) data, top to bottom: 0; 0; 7,500; 9,000; 10,500; 12,000; 13,500.
(g) Equilibrium price = $46; equilibrium output = 10,500. Each firm will produce 7 units. Loss per unit = $1.14, or $8 per firm. The industry will contract in the long run.
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