Question

You have been hired as a consultant for the following perfectly competitive firms firms. Treat each firm individually. Thus each row represents one firm. You will need to use the MR =MC analysis rules to make the recommendations to the firms. You will be using logic and critical thinking skills to make the suggestions.

Examine the information on MR, MC, Price, ATC, AVC and AFC to make a recommendation to each firm.

Remember firms want to max their total profits, they are not altruistic.

Secondly, recall the rules of profit maximization, minimizing losses, and shutdown cases for perfect competition. Apply those rules to each row to make a recommendation to each firm as to whether or not they are able to maximize profits; minimize losses; or should the firm shut down. Finally what happens to firms in the long run? Record your answers for each row and submit them to the dialog box for this assignment by the due date listed in assignments.

Below are the 4 competitors who want to max their profits. Please advise them as to what decisions they should make to accomplish this.  

PC firms

Price      Q             TR           TC           P/L         TVC        ATC        AVC       MC

4              100         400         350         +50         300         3.5          3              5

10           20           200         500         -300       300         25           15           10           

50           100         5000       5100       -100       3000       51           30           90           

25           100         2500       2500       0              2000       25           20           25

Answer 1

In short run, firms in a perfectly competitive industry produces an output level where P = MC. Similarly, if a firm should shut down if P is less than AVC (i.e. firm is not able to recover AVC)

a. Firm 1 faces a condition where price is less than Marginal Cost ( i.e. P < MC). In such a case, the firm should reduce the output level till the point where P = MC to maximize their profits.

b. Firm 2 faces a condition where price is equal to marginal cost (i.e. P= MC). Hence, this firm is producing a profit maximizing output level.

c. Firm 3 produces an output level where P<MC. In such a case, the firm should reduce the output level till the point where P = MC to maximize their profits.

d. Firm 4 faces a condition where price is equal to marginal cost (i.e. P= MC). Hence, this firm is already producing a profit maximizing output level.

It is assumed that each of these firms operate in their different industries. In the long run, firm earns normal profit i.e. it produces an output level such that P = ATC.

In the long run, more firms will enter the industry in which firm 1 operates in. As a result, the prices will decline and hence its profit will become close to 0.

Firm 2 is currently incurring losses.It will leave the industry in the long run. The same is applicable for firm 3 also.

Lastly, firm 4 will stay in the market in long run as well as its Price is equal to Long run Average Cost.