Question

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).

Answer 1

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