Question

Assume that the cost data in the following table are for a purely competitive producer:

Total Product	Average Fixed Cost	Average Variable Cost	Average Total Cost	Marginal Cost
0
1	$60.00	$45.00	$105.00	$45.00
2	30.00	42.50	72.50	40.00
3	20.00	40.00	60.00	35.00
4	15.00	37.50	52.50	30.00
5	12.00	37.00	49.00	35.00
6	10.00	37.50	47.50	40.00
7	8.57	38.57	47.14	45.00
8	7.50	40.63	48.13	55.00
9	6.67	43.33	50.00	65.00
10	6.00	46.50	52.50	75.00

Instructions: If you are entering any negative numbers be sure to include a negative sign (−) in front of those numbers. Select "Not applicable" and enter a value of "0" for output if the firm does not produce.

a. At a product price of $68.00

     (ii) If it is preferable to produce, what will be the profit-maximizing or loss-minimizing output? units per firm =

     (iii) What economic profit or loss will the firm realize per unit of output? Loss/Profit per unit = $

b. At a product price of $43.00

     (ii) If it is preferable to produce, what will be the profit-maximizing or loss-minimizing output? =  units per firm

     (iii) What economic profit or loss will the firm realize per unit of output? Loss/Profit  per unit = $

c. At a product price of $34.00

     (ii) If it is preferable to produce, what will be the profit-maximizing or loss-minimizing output? units per firm =

     (iii) What economic profit or loss will the firm realize per unit of output? profit/loss per unit = $

Instructions: Enter your answers as a whole number. If you are entering any negative numbers be sure to include a negative sign (−) in front of those numbers.

d. In the table below, complete the short-run supply schedule for the firm (columns 1 and 2) and indicate the profit or loss incurred at each output (column 3).

(1)	(2)	(3)	(4)
Price	quantity supplied, single firm	Profit or loss	Quantity Supplied, 1,500 firms
$29	$0.00	-60	0.00
24	0.00	-60	0.00
34	?	?	?
41	6.00	?	9,000
46	7.00	-8	10,500
57	8.00	?	12,000
68	9.00	?	13,500

e. Now assume that there are 1,500 identical firms in this competitive industry. That is, there are 1,500 firms, each of which has the cost data shown in the table. Complete the industry supply schedule (column 4 in the table above).

f. Suppose the market demand data for the product are as follows:

Price	Total Quality Demanded
$24.00	17,000
29.00	15,000
34.00	13,500
41.00	12,000
46.00	10,500
51.00	9,500
56.00	8,000

What is the equilibrium price? $

     Instructions: Enter your answers rounded to two decimal places. Enter positive values for profit or loss.

     What will profit or loss be per unit? (Profit or Loss) per unit =

     Per firm? $

     Will this industry expand or contract in the long run?  (Expand or Contract)

Answer 1

Set P=MC to find the profit maximizing output

It will only produce if the price is greater than minimum AVC

The firm will produce 0 units if the P<Minimum AVC and incur loss equal to its fixed cost

a) P=68

Yes, this firm will produce

Profit maximizing output = 9 units

Profit per unit = 68-50 = 18

b) P = 43

Yes, this firm will produce

Loss minimizing output = 6 units

Loss per unit = 43-47.5 = -4.5

c) P = 34

No, not produce as P<AVC

Not applicable

Output = 0 units

Total loss = -60

d and e)

P	QS-1 FIRM	P/L	QS-1500 FIRMS
24	0	-60	0
29	0	-60	0
34	0	-60	0
41	6	-39	9000
46	7	-8	10500
57	8	71	12000
68	9	162	13500

f) Equilibrium price = 46

Equilibrium output = 10500

per firm = 7 units

Loss per unit = 46-47.14 = -1.14

per firm = -7.98

This industry will contract as some loss making firms will exit the market