Assume the following cost data are for a purely competitive producer: T Average

Question

Assume the following cost data are for a purely competitive producer: T Average Average Average Marginal P Fixed Cost Variable Cost Total Cost Cost 0 $0.00 $0.00 $0.00 na 1 $60.00 $45.00 $105.00 $45.00 2 30.00 42.50 72.50 40.00 3 20.00 40.00 60.00 35.00 4 15.00 37.50 52.50 30.00 5 12.00 37.00 49.00 35.00 6 10.00 37.50 47.50 40.00 7 8.57 38.57 47.14 45.00 8 7.50 40.63 48.13 55.00 9 6.67 43.33 50.00 65.00 10 6.00 46.50 52.50 75.00 Answer the questions in the first column in the table below for the price listed at the top of each of the other three columns. Instructions: For any negative number, be sure to include a negative sign (-) in front of the number. Round your answers to two decimal places when necessary. Select "Not applicable" and enter a value of "0" for output if the firm does not produce. (a)At a product price of $58.00 (b)At a product price of $43.00 (C)At a product price of $34.00 Will this firm produce in the short run? If it is preferable to output = units output = units output = units produce, what will be the per firm per firm per firm profit-maximizing or loss-minimizing output? What economic profit or per unit = $______ Per unit=$____ =$____ loss will the firm realize per unit of output? d. In the table below, complete the short-run supply schedule for the firm (columns 1 and 2) and indicate the profit or loss incurred at each output (column 3). Instructions: Enter whole numbers for your answers in the table below. For any negative number, be sure to include a negative sign (-) in front of the number. (1) ( 2) (3) (4) Price Quantity Supplied, Profit Quantity Supplied, Single Firm or Loss (-) 1500 Firms $27.00 _________ _________ _________ 33.00 _________ _________ _________ 39.00 _________ _________ _________ 44.00 _________ _________ _________ 50.00 _________ _________ _________ 58.00 _________ _________ _________ 68.00 _________ _________ _________ e. Now assume that there are 1500 identical firms in this competitive industry; that is, there are 1500 firms, each of which has the cost data shown in the table. Complete the industry supply schedule (column 4 in the above table). f. Suppose the market demand data for the product are as follows: Price Total Quantity Demanded $27.00 17000 33.00 15000 39.00 13500 44.00 12000 50.00 10500 58.00 9500 68.00 8000 What will be the equilibrium price? $ What will be the equilibrium output for the industry? For each firm? _______ units What will profit or loss be per unit? _________ per unit = $ __________ Per firm? $_____________ Will this industry expand or contract in the long run?

Explanation / Answer

(a) Yes, $56 exceeds AVC (and ATC) at the profit-maximizing output. Using the MR = MC rule it will produce 8 units. Profits per unit = $7.87 (= $56 - $48.13); total profit = $62.96. (b) Yes, $41 exceeds AVC at the loss—minimizing output. Using the MR = MC rule it will produce 6 units. Loss per unit or output is $6.50 (= $41 - $47.50). 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—found by expanding output until MR no longer exceeds MC. 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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