Question

In: Economics

Joe’s Widget Factory operates in a perfectly competitive industry. Joe’s fixed and variable costs are given...

  • Joe’s Widget Factory operates in a perfectly competitive industry. Joe’s fixed and variable costs are given in the table below. He is a price taker and can sell as many widgets as he produces for $10 each. Complete the table using the provided link and respond to the following questions. Besides referring to your table to support your answers, include references from the course materials on profit-maximizing rules for competitive firms. Your response should be at least 75–150 words (1–2 paragraphs) in length, including table.
    • What is the profit maximizing (or loss minimizing) level of output in the short run?
    • What is the profit maximizing level of output in the long run?
    • What are the shut-down prices in the short run and long run?
    • What is the firm’s supply curve?
    Note: Use this Week 3 Assignment Worksheet to complete the following table. Be sure to incorporate your table into your Assignment submission.
Widgets Produced Fixed Costs Variable Costs Total Costs Average Variable Cost Average Total Cost Marginal Cost Price = MR Profits
0 25 0 10
1 25 8 10
2 25 15 10
3 25 23 10
4 25 32 10
5 25 42 10
6 25 53 10
7 25 65 10
8 25 78 10
9 25 92 10
  • Based on your answers to the previous set of questions, assuming there are 100 identical firms in the widget industry, construct a table showing the industry supply curve. Then, explain what you expect will happen over time to the number of firms in the industry and the equilibrium industry price of widgets. Your response should be at least 75–150 words (1–2 paragraphs) in length, including the table.

Solutions

Expert Solution

The profit maximizing rule for the competitive firm states that the firm sets P=MC=MR for maximizing its profits.

As the competitive firm is a price taker, it cannot set its own price and therefore must set the market price.

The profit maximizing (or loss minimizing) level of output in the short run by setting P=MC=MR = 5

The profit maximizing level of output in the long run is = Minimum ATC = or = 0 as the firm is unable to recover its costs

The shut-down prices in the short run is = Minimum AVC = 10 and in the long run is = Minimum ATC = 12.86

The firm’s supply curve is the portion of the MC curve which lies above the minimum AVC as the firm will not produce any output when the price is below the minimum AVC

Widgets Produced Fixed Costs Variable Costs Total Costs Average Variable Cost Average Total Cost Marginal Cost Price = MR Profits TR
0 25 0 25 10 -25 0
1 25 8 33 8 33 8 10 -23 10
2 25 15 40 7.5 20 7 10 -20 20
3 25 23 48 7.67 16 8 10 -18 30
4 25 32 57 8 14.25 9 10 -17 40
5 25 42 67 8.4 13.4 10 10 -17 50
6 25 53 78 8.83 13 11 10 -18 60
7 25 65 90 9.26 12.86 12 10 -20 70
8 25 78 103 9.75 12.88 13 10 -23 80
9 25 92 117 10.22 13 14 10 -27 90

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