Chapter 8 problem 4, a through f, on pages 179–180. Assume that the cost data in
ID: 1253906 • Letter: C
Question
Chapter 8 problem 4, a through f, on pages 179–180.Assume that the cost data in the top table of the next column are for a purely competitive producer:
a) At a product price of $56, will this firm produce in the short run? If it is preferable to produce, what will be the profit or loss minimizing output? What economic or loss will the firm realize per unit of output?
b) Answer the questions of 4a assuming product price is $41
c) Answer the question of 4a assuming product price is $32
d) In the table below, complete the short run supply schedule for the firm (column 1 and 2)and indicate the profit or loss incurred at each output (column3)
e) Now assume that there are 1500 identical firm in this competitive industry; there are 1500 firms, each of which has the cost data shown in the table. Complete the industry supply schedule (column4)
f) Suppose the market demand data for the product are as follow
Price total quantity demanded
$26 17,000
32 15,000
38 13,500
41 12,000
46 10,500
56 9500
66 8000
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.
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) Column (4) data, top to bottom: 0; 0; 7,500; 9,000; 10,500; 12,000; 13,500.
(f) 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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