Question

Assume the following unit‑cost data are for a purely competitive producer:

Total Product	Average fixed cost		Average variable cost		Average total cost		Marginal cost
0 1 2 3 4 5 6 7 8 9 10	$60.00 30.00 20.00 15.00 12.00 10.00 8.57 7.50 6.67 6.00		$45.00 42.50 40.00 37.50 37.00 37.50 38.57 40.63 43.33 46.50		$105.00 72.50 60.00 52.50 49.00 47.50 47.14 48.13 50.00 52.50		$45 40 35 30 35 40 45 55 65 75

1. At a product price of $32, will this firm produce in the short run? Why, or why not? If it does produce, what will be the profit‑maximizing or loss‑minimizing output? Explain. What economic profit or loss will the firm realize per unit of output.

Answer 1

At a product price of $30 firm will not produce in the shortrun. Because minimum price expected by a firm in a perfectly competitive market is the minimum value of the average variable cost (which is called shut down point). From the schedule above we can understand that the minimum value of AVC is $37 which is above the $32 . When the product price is $32, firm does not produce. If it produce at $32 it will be producing 3.5 units of output When it produces 3.5 units of output, it incur a per unit loss of approximately $18.75 (20.5+17/2=18.75).

Output	PRICE	TOTAL REVENUE	MARGINAL REVENUE	MARGINAL COST	AVERAGE VARIABLE COST	AVERAGE COST	profit/loss
0	32	0		45	45	105
1	32	32	32	40	42.5	72.5	-40.5
2	32	64	32	35	40	60	-28
3	32	96	32	30	37.5	52.5	-20.5
4	32	128	32	35	37	49	-17
5	32	160	32	40	37.5	47.5	-15.5
6	32	192	32	45	38.57	47.14	-15.14
7	32	224	32	55	40.63	48.13	-16.13
8	32	256	32	65	43.33	50	-18
9	32	288	32	75	46.5	52.5	-20.5