Question

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A firm operates in a perfectively competitive industry. Given the market price of 20 and the...

A firm operates in a perfectively competitive industry. Given the market price of 20 and the firm’s marginal cost function MC=-8+2Q. In addition, the average variable cost is equal to the marginal cost at 15 units of output. Use the information to answer questions 14 and 15.

  1. Which of the following units of output would be chosen by the firm?

  1. 10 units

  2. 14 units

  3. 22 units

  4. 32 units


  1. Should the firm continue its business and why?

  1. Yes, because the market price is higher than the average variable cost at 15 units of output.

  2. Yes, because the market price is lower than the average total cost at 15 units of output.

  3. No, because the market price is lower than the average variable cost at 15 units of output.

  4. No, because the market price is lower than the average total cost at 15 units of output.

Solutions

Expert Solution

A) Perfect competition firm equilibrium at, P= MC

20=-8+2Q

Q=28/2=14

So firm will produce 14 units

B) Average variable cost is minimum,where it is equal to marginal cost.

Min AVC= MC=-8+2*15=22

Because price is lower than minimum average variable cost,so firm shouldn't Operate and shut down .

Rahul Sunny answered 2 years ago
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