A firm in a purely competitive industry is currently producing 1,400 units per day at a...

A firm in a purely competitive industry is currently producing 1,400 units per day at a total cost of $600. If the firm produced 1,200 units per day, its total cost would be $400, and if it produced 900 units per day, its total cost would be $375.

Instructions: In parts a and c, round your answers to 2 decimal places. In part d, round your answer to 1 decimal place.

a. What are the firm's ATC at these three levels of production?

At 1,400 units per day, ATC = $ .

At 1,200 units per day, ATC = $ .

At 900 units per day, ATC = $ .

b. If every firm in this industry has the same cost structure, is the industry in long-run competitive equilibrium? (Click to select) No Yes .

c. From what you know about these firms’ cost structures, what is the highest possible price per unit that could exist as the market price in long-run equilibrium? $ .

d. If that price ends up being the market price and if the normal rate of profit is 10 percent, then how big will each firm’s accounting profit per unit be? cents per unit.

Solutions

Expert Solution

a) ATC= TC/Q

At 1,400 units per day, ATC = $600/1400=$0.43.

At 1,200 units per day, ATC = $400/1200=$0.33

At 900 units per day, ATC = $375/900=$0.42

b) No, the firm is not in equilibrium as the ATC of $0.43 is higher than the minimum ATC of $033. In long term equilibrium for a perfectly competitive firm, P= Minimum ATC.

c) $0.33 as it is the lowest ATC.

d) The long term market price is $0.33 per unit. A 10% normal profit is 10% of $0.33=$0.033 or 3.3 cents per unit.

Rahul Sunny answered 1 year ago

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