Assume a single firm in a purely competitive industry has variable costs as indi
ID: 1237637 • Letter: A
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Assume a single firm in a purely competitive industry has variable costs as indicated in the following table in column 2. Complete the table and answer the questions. (1) Total product (2) Total var. cost (3) Total cost (4) AFC (5) AVC (6) ATC (7) MC 0 $ 0 $ 40 $_____ $_____ $_____ 1 55 _____ _____ _____ _____ $_____ 2 75 _____ _____ _____ _____ _____ 3 90 _____ _____ _____ _____ _____ 4 110 _____ _____ _____ _____ _____ 5 135 _____ _____ _____ _____ _____ 6 170 _____ _____ _____ _____ _____ 7 220 _____ _____ _____ _____ _____ 8 290 _____ _____ _____ _____ _____ (a) At a product price of $52, will this firm produce in the short run? Explain. What will its profit or loss be? In the short run there will be a profit of $104.00 (b) At a product price of $28, will this firm produce in the short run? Explain. What will its profit or loss be? (c) At a product price of $22, will this firm produce in the short run? Explain. What will its profit or loss be? (d) Complete the following short-run supply schedule for this firm. Product Quantity Profit (+) price supplied or loss (Explanation / Answer
Totalproduct(2)Totalvar. cost(3)Totalcost(4)AFC(5)AVC(6)ATC(7)MC0 $ 0 $ 40 ––– ––– ––– –––1 55 95 $40 $55 $95 $552 75 115 20 37.50 57.50 203 90 130 13.33 30 43.33 154 110 150 10 27.50 37.50 205 135 175 8 27 35 256 170 210 6.67 28.33 35 357 220 260 5.71 31.43 37.14 508 290 330 5 36.25 41.25 70
(a) The firm will produce 7 units ($52 covers MC of $50), at a profit of $14.86 per unit or total profit of 7 x $14.86 = $104.02.
(b) The firm will produce 5 units ($28 covers AVC of $27 and MC of $25) at a loss of $7 per unit or 5 x $7 = $35 total loss which is less than $40 fixed cost loss incurred by shutting down in the short run.
(c) The firm will shut down in the short run and absorb the fixed cost loss of $40. There is no output level where $22 covers AVC.
Product Quantity Profit (+)price supplied or loss (–)$72 8 +$246 52 7 +104 45 6 +60 28 5 –30 22 0 –40 15 0 –40
(d) See table above.
(e) $52(f) 7 units
(g) Plus $14.86
(h) Plus $104.02
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