The following table shows how the total cost of producing canisters of peanuts v
ID: 2774154 • Letter: T
Question
The following table shows how the total cost of producing canisters of peanuts varies with output and capital in the long run in a perfectly competitive industry. Quantity of Peanut Canisters each hour 0 1 2 3 4 5 6 7 8 Total Cost (K=1) (in dollars) 0 1.00 1.50 3.00 5.00 7.50 10.00 12.50 16.00 Total Cost (K=2) (in dollars) 1.00 1.40 1.70 2.10 2.90 3.80 5.00 6.00 7.20 Total Cost (K=3) (in dollars) 2.00 12.30 2.50 2.60 2.80 3.60 4.50 5.50 6.70 3. Refer to Table . What levels of capital (K=1, K=2, or K=3) would the firm choose in the long run for producing three canisters and five canisters of peanuts per hour, respectively? 4. Refer to Table. If firms can freely enter or exit the industry and face the cost structures specified, what is the likely long-run price of a canister of peanuts? 5. What would be the long-run equilibrium result of output expansion in a decreasing-cost industry? 6. What is productive efficiency? Does it guarantee that markets are operating efficiently?
Explanation / Answer
In long run, company will choose k-3 capital for producing three canisters and five canisters of peanuts per hour as total cost per production is decreasing in K - 3 in long run and K3 will be benefecial in long run.
Answer 4
as markeyt is free for entry and exit, so price should be kept which able to cover cost of a canister, and with minimum profit, in order to survive in indutry along with the competitors.
As %age of profit is not given so canot calculate long run price of a canister
answer 5
Decreasing cost industry is influenced by external economics as they expand. Due to the effect of external economies, the set of cost curves of the firm shifts downward. In other words, there are net economies. But due to net economics, the cost curves of all firms will fall.
The net economies accrue as trained labour, cheap raw-material and other such facilities are available. So under decreasing cost industry, the additional supplies of product will be coming forth at a reduced cost and supply curve will slope downward from left to right
With the increase in demand price also increases . At increased price the firms working in the industry will increase their production from. At increased price firms are enjoying supernormal profits. These supernormal profits will attract new firms in the industry.
When new firms enter the industry, industry’s short run supply curve will shift to right. As a result, equilibrium price will reducesay OP2. In decreasing cost industry, entry of new firms must bring down factor prices. Fall in factor prices will cause the cost curves of the firms to shift downward. Now long run equilibrium price OP2 will be less than the initial price OP. Industry’s new equilibrium output will increase.
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