Question

Consider the following information about perfectly competitive firms selling milk.

Demand in the market is shown in the table below

Price ($)	Quantity Demanded (gallons)	Total Cost ($)
18	300	$50
14	400	$160
10	500	$125
6	600	$145
2	700	$170

Each producer in the market has the following costs

Quantity (gallons)	Total Cost ($)	Average Total Cost ($/gallon)	Marginal Cost ($)
0	9
1	10
2	13
3	18
4	25
5	34

a. Compute each producer’s marginal cost and average total cost for 1 to 5 gallons.

b. The price of a gallon of milk is now $10. How many gallons are sold? How many gallons does each producer make? How many producers are there? How much profit does each producer earn?

c. Is the situation described in part (b) a long-run equilibrium? Why or why not?

Answer 1

(a)

Quantity (gallons)	Total cost ($)	Average total cost ($)	Marginal cost ($)
0	9	----	-----
1	10	10	1
2	13	6.5	3
3	18	6	5
4	25	6.25	7
5	34	6.8	9

Average total cost = Total cost / Quantity

Marginal cost = Change in total cost / Change in Quantity

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(b)

A perfectly competitive firm produces at P =MC.

A perfectly competitive firm produces till Price is greater than MC or Price = MC.

Price is $10 per gallon of milk,

Price is greater than MC till 5 gallons of milk.

Hence, the firm will sold 5 gallons of milk.

At a price of $10, the market demand is 500 gallons and each producer is selling 5 gallons of milk.

No. of firms = (Market demand / Each producer production)

=>No. of firms = (500 / 5)

=> No. of firms = 100

There are 100 firms (producers)  in the market.

Total cost of producing 5 gallon of milk by a producer is $34.

Total revnnue generate by a producer by selling 5 gallons of milk = 5 * $10 = $50

Profit of each producer = TR - TC

=> Profit of each producer = $50 - $34 = $16

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(c) In short run, a perfectly competitive firm can earn economic profit or economic loss.

In long run, a perfectly competitive firm earn zero economic profit.

Since, the profit earn by each producer is $16

It means the situation described in part (b) is not a long run equilibrium .