Question

Assume the following cost data are for a purely competitive firm:

Total product	Average fixed cost	Average variable cost	Average total cost	Marginal cost
0
1	60	45	105	45
2	30	42.5	72.5	40
3	20	40	60	35
4	15	37.5	52.5	30
5	12	37	49	35
6	10	37.5	47.5	40
7	8.57	38.57	47.14	45
8	7.5	40.63	48.13	55
9	6.67	43.33	50	65
10	6	46.5	52.5	75

1. At a product price of $56, will this firm produce in the short run? Why or why not? If it is preferable to produce, what will be the profit-maximizing or loss-minimizing output? Explain. What economic profit or loss will the firm realize per unit of output.
2. Answer the relevant questions of (i) assuming product price is $41
3. Answer the relevant questions of (i) assuming product price is $32
4. Which will be the price the company will have to confront in the long run, assuming freedom to entry and exit and identical costs for all players?  (Hint: remember the long-run ATC curve)

Answer 1

a.

yes.

because price is above avrage variable cost and avrage total cost.

profit maximization output will be 8.

because, firm maximizes its profit where MR equals to MC and here at any quantity MR is not equal to MC. so firm will produce where MR is greater than MC before MR is start becoming less than MC.

Profit per unit=(Price-ATC)

=(56-48.13)

=7.87

b.

yes.

because price is above avrage variable cost.

loss minimizing quantity will be 6.

because, firm maximizes its profit where MR equals to MC and here at any quantity MR is not equal to MC. so firm will produce where MR is greater than MC before MR is start becoming less than MC. in perfect competition MR=price. here at 6 quantity MR>MC=41>40.

Profit per unit=(Price-ATC)

=(41-47.5)

=-6.5

c.

no

because price is less than avrage variable cost.

loss minimizing quantity will be 0.

d.

47.14

explanation:

in longrun firm will produce Where ATC is minimum. minimum ATC is 47.14. so firm price will be 47.14.