Question

In: Economics

1.) At current output a profit maximizing competitive firm gets $8 per unit produced and has...

1.) At current output a profit maximizing competitive firm gets $8 per unit produced and has average total costs of $12. When the market price is $8, the firm's marginal cost curve crosses its marginal revenue curve where Q=120 units.

a. Draw two graphs side-by-side: On the left side, sketch a representation of the market equilibrium (i.e. supply, demand, market equilibrium quantity and market equilibrium price). On the right side, sketch a representation of the individual competitive firm's cost curves (I haven't provided much information about the actual shape, but draw something consistent with the given data). Make sure the market equilibrium price determined in your leftmost graph appears in your rightmost graph: Each individual firm takes the market price as given!

b. What is the firm's current level of profit? Do you anticipate entry or exit into the market? Explain your reasoning.

2.) Suppose a competitive firm previously set its price at $15 per unit to maximize its profit, which had been positive. Then the market price falls to $12 and the firm adjusts in order to maximize its profits at the decreased price. After these adjustments what can we conclude about the firm’s quantity of output, average total cost, and marginal revenue in terms of being higher, lower, or the same as before?

Solutions

Expert Solution

Answer:-

(1). (a) In the left panel of the following graph, D0 & S0 are market demand & supply curves intersecting at point A with market price P0 (= $8) & market quantity Q0. Firms take this price as taken and it is shown in the right panel where firms produce at point B where P0 intersects MC, with firm output q0 (= 120). At this level, ATC being higher than P0, there is a loss equal to area P0BCD.

(b) Since ATC > Price at current output level, there is a loss.

Loss = q0 x (ATC - P0) = 120 x $(12 - 8) = 120 x $4 = $480

Since firms are making a short run economic loss, exit being free, some firms will exit the market and the process will continue until each existing firm earns zero economic loss.

(2). Firm's quantity of output will increase as demand for the product will increase with a decrease in the price of the commodity.

Average total cost is equal to total cost divided by a number of goods sold.

As the price has decreased and quantity has increased, the average total cost will also, decrease.

Change in total revenue divided by change in total output is equal to marginal revenue as both the things will increase, marginal revenue will remain unchanged.


Related Solutions

1.) At current output a profit maximizing competitive firm gets $8 per unit produced and has...
1.) At current output a profit maximizing competitive firm gets $8 per unit produced and has average total costs of $12. When the market price is $8, the firm's marginal cost curve crosses its marginal revenue curve where Q=120 units. a. Draw two graphs side-by-side: On the left side, sketch a representation of the market equilibrium (i.e. supply, demand, market equilibrium quanity and market equilibrium price). On the right side, sketch a representation of the individual competitive firm's cost curves...
At the current level of output, a profit-maximizing firm in a competitive market earns average revenue...
At the current level of output, a profit-maximizing firm in a competitive market earns average revenue of $25, has an average total cost of $22 and an average variable cost of $17. If the firm's marginal cost curve is equal to its average total cost curve at an output level of 20,000 units, then the firm earns profit of $60,000 at its current level of output. True False The short-run supply for a firm in a perfectly competitive market will...
A profit-maximizing competitive firm has the production function ? = ?^.25?^.25 , where output ? is...
A profit-maximizing competitive firm has the production function ? = ?^.25?^.25 , where output ? is produced using capital (?) and labor (?). The price of labor is $2 and the price of capital is $6. The price of the firm’s output is $100. a. Write the firm’s profit function and calculate the first-order conditions. Provide an economic interpretation for each of the first-order conditions. b. Find the profit-maximizing quantities ?* and ?*. c. Find the firm’s total costs. d....
A profit-maximizing firm in a competitive market is currently producing 200 units of output. It has...
A profit-maximizing firm in a competitive market is currently producing 200 units of output. It has a marginal cost of $15, the average total cost of $10, and a fixed cost of $200 (a) What is its profit? (b) What is its average revenue? (c) What is its average variable cost?
1. The Profit-maximizing Level of output for a perfectly competitive firm in the short run occurs...
1. The Profit-maximizing Level of output for a perfectly competitive firm in the short run occurs where: a. marginal revenue equals price B. Total revenue equals total cost C.marginal cost equals price D. Average revenue equals average total cost 2. Marginal revenue is a firms: A. Ratio of the change in total revenue to change in output. B. Profit per unit times the number of units sold C. Ratio of average revenue to total revenue D. Increase in profit when...
1. Suppose, a perfectly competitive firm is trying to determine its profit-maximizing level of output. The...
1. Suppose, a perfectly competitive firm is trying to determine its profit-maximizing level of output. The product sells for $260 per unit. The total cost function is given by C = 1000 + 80Q – 6Q2 + .2Q3. Find the equilibrium price and maximum profits. Also, find the shutdown point for this firm. 2. You are the manager of a monopolistically competitive firm, and your demand and Cost functions are given by Q = 20 – 2P and C =...
A profit maximizing firm in a competitive market is currently producing 100 units of output. It...
A profit maximizing firm in a competitive market is currently producing 100 units of output. It has average revenue of $10, average total costs of $8, and a fixed costs of $200. What is its profit, marginal cost, and average variable cost? Is the efficient scale of the firm more than, less than, or exactly 100 units?
How do a competitive firm, monopolist and monopolistically competitive firm determine its profit-maximizing level of output...
How do a competitive firm, monopolist and monopolistically competitive firm determine its profit-maximizing level of output and price? Explain your answer.
A certain competitive firm sells its output for $10 per unit. The 200th unit of output...
A certain competitive firm sells its output for $10 per unit. The 200th unit of output that the firm produces has a marginal cost of $11. Which of the following is not necessarily true? Select one: a. Production of the 200th unit of output increases the firm's total revenue by $10. b. Production of the 200th unit of output increases the firm's variable cost by $11. c. Production of the 200th unit of output increases the firm's total cost by...
8-1. In which of the following situations should a profit-maximizing firm leave its output unaltered?
8-1. In which of the following situations should a profit-maximizing firm leave its output unaltered?A) MR > MC and Price > Average total costB) MR = MC and Total revenue < Total variable costC) MR < MC and Price < Average total costD) MR = MC and Total revenue > Total variable cost8-2. Suppose that, recognizing that an efficient market out come may not be equitable, a central planner announces that each agent's net benefit (the difference between the reservation...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT