Question

1.

1. Discuss the conditions for profit maximization for the perfectly competitive firm in the short run. In addition to the basic criteria, describe the cost and revenue situations on either side and why, in terms of cost and revenue, the firm will move toward that optimal point. Consider an avocado farmer operating as such a firm. He owns four acres of land on which to plant a single crop. To plant one acre of avocados, he must pay $30 in seeds, $60 in fertilizer, $150 in gasoline, and $10 in labor. He owes $500 for mortgage on the land, and $750 for the lease of the tractor. He expects to gain $800 per acre of avocados in revenue. Given the small size of the farm, assume that marginal productivity is constant. Provide the total and average revenues, costs, and profits when he plants all four acres. Consider now that the farmer has the option to plant tomatoes instead of avocados. Planting an acre of tomatoes comes with the following costs: $15 in seed, $70 in fertilizer, $50 in gasoline, and $65 in labor. He can expect to earn $850/acre for planting tomatoes instead of avocados. What will the farmer choose to plant? Why? Include the difference in economic and accounting profit in your discussion. Provide an example of a short run decision that might be made to reduce costs.

2. Discuss the average and marginal cost curve structure of a perfectly competitive firm in the short run. Include any pertinent minima, cross points, and relationships between curves.

Answer 1

Answer -

Firms set marginal revenue equal to marginal cost (MR = MC) in order to maximise income in a perfectly competitive market. ... It is possible for economic profits to be positive, zero or negative in the short term. When the price is higher than the overall average cost, the business makes a profit.

There is only one big decision to make for a perfectly competitive market, namely what amount to manufacture. Consider a different way of writing out the simple meaning of benefit to explain why this is so:

Profit = Total Revenue − Total cost

(price )(Quantity produced) − (Average Cost) Quantity produced)
Since a perfectly competitive company must accept the price for its production as dictated by the market demand and availability of the commodity, it does not select the price it charges. This is already calculated in the profit equation, such that any number of units can be sold at exactly the same price by a perfectly competitive company. It means that the company faces a perfectly elastic demand curve for its product: consumers are willing to purchase at the market price any amount of units of production from the company. If the perfectly competitive company decides what quantity to produce, this quantity will decide the overall sales, total costs, and eventually the amount of income of the company, along with the prices prevailing in the production and input market.