Question

A firm in a purely competitive industry is currently producing 1,200 units per day at a total cost of $500. If the firm produced 1,000 units per day, its total cost would be $350, and if it produced 700 units per day, its total cost would be $325.

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

	At 1,200 units per day, ATC = $0.45 At 1,000 units per day, ATC = $0.35 At 700 units per day, ATC = $0.46

b. If every firm in this industry has the same cost structure, is the industry in long-run competitive equilibrium?

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? $0.38

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?

Answer 1

1)

	ATC	ATC
At 1,200 units per day, ATC	$500 / 1200 units	0.42
At 1,000 units per day, ATC	$350 / 1000 units	0.35
At 700 units per day, ATC	$325 / 700 units	0.46

　

2) No, the industry is not in long-run equilibrium. The reason is that in the industry the firms are not producing at the minimum point on their ATC curves; rather production of the company is at an output level higher than minimum average total cost.

3) In long-run equilibrium the highest possible price per unit that could exist to be the market price equals $0.35. The reason is that the abive calculations reveal that it is the lowest of the three ATC per unit and firms need tp produce at the lowest possible ATC per unit in long-run equilibrium

4) In the long run when $0.35 ends up being the equilibrium price in market; and if the normal rate of profit that need to hold in long-run equilibrium is 10%, the firm would be earning a normal profit of 3.5 cents per unit (= 10% X $0.35)