Question

In: Economics

4. This is the data for a perfectly competitive producer. Output Total Cost 0 100 5...

4. This is the data for a perfectly competitive producer.

Output Total Cost

0 100

5 110

10 130

15 170

20 220

25 290

30 380

35 490

A) How much will this firm produce when the price is $ 8? Why?

B) How much profit or loss will he make?

C)The firm comes to you for advice. Should he shut down? YES? NO? What are you basing your decision on?

5. Based on the data in question 4 what will be the price in the long run in this market? Show with a graph on how the market and producers will reach it.

Expert Solution

4.

A) A perfectly competitive producer maximizes profit at the point where P = MC. At P = $8, the producer maximizes profit by producing 15 units of output.

B) At this level of output, he will make a loss of $50 [Calculated in the table]

C) In case of loss, the question arises whether a firm should continue production or shut down the business?

Let us analyze the situation;

A firm can incur lose when market price is less than Average Total Cost (ATC). If the price is less than ATC but greater than Average variable Cost (AVC), it means the market price covers all it's variable costs and some portion of fixed cost. In this situation the loss amount is a portion of fixed cost. So, the firm should continue production even at loss.

Thus, in the above case, at the profit maximizing output, the AVC (i.e., $4.67) is less than the maket price (i.e., $8). Therefore. the firm should not shut down.

Rahul Sunny answered 2 years ago

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