Assume that the cost data in the table below are for a purely competitive produc
ID: 1253759 • Letter: A
Question
Assume that the cost data in the table below are for a purely competitive producer:
Total
Product
Average
Fixed Cost
Average Variable Cost
Average Total Cost
Marginal
Cost
0
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
(1)
Price
(2)
Quantity Supplied, Single Firm
(3)
Profit (+)
Or Loss (-)
(4)
Quantity Supplied
1500 Firms
$26
$
32
38
41
46
56
66
Price
Total Quantity Demanded
$26
17,000
32
15,000
38
13,500
41
12,000
46
10,500
56
9,500
66
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
$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
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 x $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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