A perfectly competitive firm faces a market-determined price of $25 for its prod

Question

A perfectly competitive firm faces a market-determined price of $25 for its product. a. The firm's total costs are given in the schedule above. Fill in columns 3 and 4 for average total cost and marginal cost. b. Fill in columns 5 and 6 for marginal revenue and profit margin. c. How much output should the competitive firm produce? Explain. d. Label column 7 "Total profit" and fill in the values. Is your answer to correct? Explain. e. Suppose the demand for the firm's product decreases and the market price falls to $14. Should, the firm shut down? If not, how much output should the firm produce? Explain.

Explanation / Answer

a) Average total cost=Total cost/Quantity

Marginal cost= change in total cost/change in quantity

b) Total revenue=Price*Quantity

Marginal revenue=change in total revenue/change in quantity

Profit margin=change in total revenue-change in total cost

=Marginal revenue-marginal cost

c) Competitive firm should produce output where Price=Marginal Cost

Here at Quantity=400, P=25 and Marginal cost=22 and at Quantity=500, P=25 and Marginal cost=26 so competitive firm would stop Marginal cost=22 and produce Quantity=400. Going beyond would make its profit margin negative. Or we can directly conclude that it will produce Quantity=400 as beyond that profit margin is negative

d) Yes the answer is correct. Profit is maximum at Quantity=400

Price Quantity Total cost Average Total cost Marginal Cost Total Revenue Marginal Revenue Profit Margin Total profit 25 0 1000 --- --- 0 --- -1000 25 100 2000 20 10 2500 25 -0.5 500 25 200 3300 16.5 13 5000 25 3.4 1700 25 300 4800 16 15 7500 25 1.6 2700 25 400 7000 17.5 22 10000 25 1.1 3000 25 500 9600 19.2 26 12500 25 1.0 2900

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