Question

Suppose Mimi's Magic Marker Company operates in a perfectly competitive market and is producing its profit-maximizing level of output. Suppose further that at this level of production its average fixed cost of producing magic markers is $0.05, average variable cost is $0.15, and marginal revenue is $0.25.

At her current level of production, what is…

a) the average total cost of producing magic markers?

b) the marginal cost of producing magic markers?

c) the price of a magic marker?

d) Mimi’s profit from selling magic markers?

Over time, what will happen to…

a) the number of firms selling magic markers?

b) the price of magic markers?

c) the quantity of magic markers transacted in the market?

d) the quantity of magic markers produced by Mimi?

e) profits of firms operating in the magic marker market?

Answer 1

Given that

Average fixed cost=AFC=$0.05

Average variable cost=AFC=$0.15

Marginal Revenue=$0.25

At her current level of production, what is…

a) the average total cost of producing magic markers?

ATC=AFC+AVC=0.015+0.15=$0.20

b) the marginal cost of producing magic markers?

At profit maximizing output, MR=MC. So,

Marginal Cost=Marginal Revenue=$0.25

c) the price of a magic marker?

A perfectly competitive firm sets its output level such that Marginal Cost=Market price.

So, Price=Marginal Cost=$0.25

d) Mimi’s profit from selling magic markers?

Profit=Price-ATC=0.25-0.20=$0.05 per unit

Over time, what will happen to…

a) the number of firms selling magic markers?

In the given case, economic profit is positive. It will attract more firms to enter the market. Number of firms selling magic makers will increase.  

b) the price of magic markers?

Since, number of firms will increase, supply will increase. Market forces will pull down the price. Market price will decrease over time.

c) the quantity of magic markers transacted in the market?

There will be higher number of firms in the the market. New equilibrium price will be attained at higher quantity with lower price. Quantity of magic makers transactions will increase.

d) the quantity of magic markers produced by Mimi?

Since market price is likely to come down. A perfectly competitive firm sets its output level such that Marginal Cost=Market price. Quantity of magic makers produced by Mimi will decrease.

e) profits of firms operating in the magic marker market?

Since price and output of each is expected to decrease over time. Economic profit will come down. It will be zero in long run.