Question

In: Economics

Topic 2: A Firm's Production Decision in a Perfectly Competitive Market

Topic 2: A Firm's Production Decision in a Perfectly Competitive Market

Refer to the contents in Week 5, as well as your notes and example.

Parts 1 and 2

Using Excel, create a cost table with the following:

  • Up to 6 workers with output (Q)

  • The number of workers (L)

  • The total fixed cost (FC)

  • The total variable cost (VC)

  • The total cost (TC)

  • The average fixed, variable, and total costs (AFC, AVC, ATC)

  • The marginal cost (MC)

Then, determine two market prices: one in which the firm has positive profit and one in which the firm has losses but continues to operate in the short run. For both, determine the profit maximizing output. Next, find the long-run market price based on the firm’s cost of production.

When completing Parts 1 and 2, use graphs if necessary.

Part 3

Find an industry in which small firms compete and describe the market and costs. Then, describe how firms adapt when market prices change. Make sure you have at least three reliable sources (newspaper articles, scholarly papers, et cetera).

Solutions

Expert Solution

Let's assume that each worker produces 1 unit, the wage per worker is 30, fixed cost is 50. Let us assume that there is no other variable cost, in order for the firm to continue P>AVC, so we can create table like below and input the prices to get a range of negative profits such that P>AVC and positive profits such that P>AVC.  

Labour Total Product Fixed Cost Variable Cost Total Cost Average Variable Cost Average Fixed Cost Average Total Cost Marginal Cost Total Revenue Marginal Revenue Profit or Loss Price
L Q FC VC TC AVC AFC ATC MC TR MR Pr P
L*W FC+VC VC/Q FC/Q TC/Q TC - TC(-1) P*Q TR - TR(-1) TR-TC 35
0 0 50 0 50
1 1 50 30 80 30 50.00 80.00 30 35 35 -45 Wage
2 2 50 60 110 30 25.00 55.00 30 70 35 -40 W
3 3 50 90 140 30 16.67 46.67 30 105 35 -35 30
4 4 50 120 170 30 12.50 42.50 30 140 35 -30
5 5 50 150 200 30 10.00 40.00 30 175 35 -25
6 6 50 180 230 30 8.33 38.33 30 210 35 -20

For a range of negative profits, price shall not be greater than the lowest ATC. For negative profit, loss minimization happens at Q=6 when loss=-25

Labour Total Product Fixed Cost Variable Cost Total Cost Average Variable Cost Average Fixed Cost Average Total Cost Marginal Cost Total Revenue Marginal Revenue Profit or Loss Price
L Q FC VC TC AVC AFC ATC MC TR MR Pr P
L*W FC+VC VC/Q FC/Q TC/Q TC - TC(-1) P*Q TR - TR(-1) TR-TC 85
0 0 50 0 50
1 1 50 30 80 30 50.00 80.00 30 85 85 5 Wage
2 2 50 60 110 30 25.00 55.00 30 170 85 60 W
3 3 50 90 140 30 16.67 46.67 30 255 85 115 30
4 4 50 120 170 30 12.50 42.50 30 340 85 170
5 5 50 150 200 30 10.00 40.00 30 425 85 225
6 6 50 180 230 30 8.33 38.33 30 510 85 280

For positive profit, price shall be greater than the highest ATC. For positive profit, profit minimization happens at Q=6 when profit=280


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