Question
In: Economics
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.
- Which of the following units of output would be chosen by the firm?
- 10 units
- 14 units
- 22 units
- 32 units
- Should the firm continue its business and why?
- Yes, because the market price is higher than the average variable cost at 15 units of output.
- Yes, because the market price is lower than the average total cost at 15 units of output.
- No, because the market price is lower than the average variable cost at 15 units of output.
- No, because the market price is lower than the average total cost at 15 units of output.
Solutions
Expert Solution
Answer 1: Option b. 14 units.
For a perfectly competitive firm, Price is equal to marginal cost of the firm is the optimum condition. In the above case, equilibrium outout produced by the firm is given by:
20 = -8+2Q
28 = 2Q
Thus, Q = 14 units.
Answer 2: Option a.
The minimum AVC of the firm occurs at the point where AVC = MC, Thus, AVC at 5 units of output = -8 + 2 * 5 = 2.
Since price is higher than minimum AVC of the firm, thus firm should continue its business in the above case.
Rahul Sunny answered 2 years agoRelated Solutions
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