Question

In: Economics

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

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.

Solutions

Expert Solution

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.


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