Question

Consider the following cost information for a firm that operates in a perfectly competitive market.  

Q (quantity of output)	Total cost ($)
0	6
2	26
4	36
6	50
8	68
10	90
12	118

(1) Suppose that the market price is $9. Find the quantity of output that the firm should produce in the short run.    

(2) Suppose that the market price drops from $9 to $7. Find the quantity of output that the firm should produce in the short run.

Answer 1

1.)

Q	TC	FC	VC=TC/Q	MC=TCn-TCn-1	MR=AR=P	TR=AR/Q	Profit=TR-TC
0	6	6	0	0	9	0	-6
2	26	6	20	20	9	18	-8
4	36	6	30	10	9	36	0
6	50	6	44	14	9	54	4
8	68	6	62	18	9	72	4
10	90	6	84	22	9	90	0
12	118	6	112	28	9	108	-10

In perfectly competitive market,there are two conditions to be fulfilled i.e.,

i.) MC=MR

ii.) MC is greater than MR after MR=MC or MC cuts MR from below.

So,if Market price is $9, the firm should produce at 4 units of output level.No profit no loss situation.

2.) If market price drops from $9 to $7 ,the firm should produce

Q	TC	MC	MR	TR	PROFIT
0	6	0	7	0	-6
2	26	20	7	14	-12
4	36	10	7	28	-8
6	50	14	7	42	-8
8	68	18	7	56	-12
10	90	22	7	70	-20
12	118	28	7	84	-34

Here,neither (i.) nor (ii.) condition is fulfilled. So,firm will not produce at this price,because firm will only bear losses at this market price.