Question

Q1. Assume a perfectly competitive firm's total cost (TC) for differents levels of oututes Q is given by:

Q TC

0 50

1 100

2 140

3 170

4 190

5 210

6 230

7 260

8 300

9 350

10 410

In the table format for the range of output (Q) provided determine: average total costs, average fixed cost, average variable costs, and marginal costs. At a price of $35 how many units will be produced in the short run? At this price how many units will be produced in long run?

Answer 1

Following is the required table -

Q	TC	FC	VC	ATC (TC/Q)	AFC (FC/Q)	AVC (VC/Q)	MC
0	50	50	-	-	-	-	-
1	100	50	50	100	50	50	50
2	140	50	90	70	25	45	40
3	170	50	120	56.67	16.67	40	30
4	190	50	140	47.50	12.50	35	20
5	210	50	160	42	10	32	20
6	230	50	180	38.33	8.33	30	20
7	260	50	210	37.14	7.14	30	30
8	300	50	250	37.50	6.25	31.25	40
9	350	50	300	38.88	5.55	33.33	50
10	410	50	360	41	5	36	60

In short-run, a perfectly competitve firm produce that level of output corresponding to which price equals MC or upto that lebel of output upto which price exceeds MC.

If price is $35 per unit then this price exceeds MC upto production of 7 units of output.

So, in short-run, firm will produce 7 units.

In long-run, firm produces that level of output corresponding to which price equals minimum ATC.

Minimum ATC is $37.14. The Price is $35.

Since, price is less than minimum ATC, firm will not operate in long-run.

It will exit the market in the long-run.