Assume that the cost data in the following table are for a purely competitive pr
ID: 1217561 • Letter: A
Question
Assume that the cost data in the following table are for a purely competitive producer:
1 $60.00 $45.00 $105.00 $45
2 30.00 42.50 72.50 40
3 20.00 40.00 60.00 35
4 15.00 37.50 52.50 30
5 12.00 37.00 49.00 35
6 10.00 37.50 47.50 40
7 8.57 38.57 47.14 45
8 7.50 40.63 48.13 55
9 6.67 43.33 50.00 65
10 6.00 46.50 52.50 75
a. At a product price of $56, what quantity of production will maximize profit? Explain. What is the profit (or loss) per unit at that level of output?
b. Answer the questions of part a assuming product price is $41.
c. Answer the questions of part a assuming product price is $32.
Explanation / Answer
(a) In case of perfect competition, a firm maximizes its profit when it produces that level of output at which price equal marginal cost or price exceeds marginal cost and after that level of output marginal cost exceeds price.
The given table shows that if product price is $56 per unit then firm can maximize its profit by producing 8 units because MC (55) corresponding to 8 units is less than price (56) and production of one more unit (9th unit) results in MC (65) exceeds the price (56).
So, production of 8 units will maximize the profit at a product price of $56.
Calculate profit per unit when 8 units (profit-maximizing output) are produced -
Profit per unit = Price - ATC when 8 units are produced = $56 - $48.13 = $7.87
The profit per unit is $7.87.
(b) In case of perfect competition, a firm maximizes its profit when it produces that level of output at which price equal marginal cost or price exceeds marginal cost and after that level of output marginal cost exceeds price.
The given table shows that if product price is $41 per unit then firm can maximize its profit by producing 6 units because MC (40) corresponding to 6 units is less than price (41) and production of one more unit (7th unit) results in MC (45) exceeds the price (41).
So, production of 6 units will maximize the profit at a product price of $41.
Calculate profit(loss) per unit when 6 units (profit-maximizing output) are produced -
Profit per unit = Price - ATC when 6 units are produced = $41 - $47.50 = -$6.50
Negative profit implies loss
The loss per unit is $6.50.
(c) In short-run, a firm produces untill P minimum AVC. If price become less than minimum AVCthen firm shuts down.
The minimum AVC in given case is $37.
Since, product price of $32 per unit is less than minimum AVC, firm will shut down or will not produce anything at $32 per unit.
Even if firm produce then it will produce 4 units because product price of $32 per unit exceeds MC when 4 units are produced.
Production of 4 units will result in loss of ($60 - $32) $28 per unit.
However, if firm does not produce then also loss will be equal to $15 per unit (average fixed cost).
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