Determining output and profit of prefectly competitive firm
Assume the following cost data are for a purely competitive producer:
a. At a product price of $56, will this firm produce in the short run? Why or why not? If it is preferable to 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?
b. Answer the relevant questions of 4a assuming product price is $41.
c. Answer the relevant questions of 4a assuming product price is $32.
d. In the table below, complete the short-run supply schedule for the firm (columns 1 and 2) and indicate the profit or loss incurred at each output (column 3).
Price Quantity Supplied Single Firm Profit Or Losse Quantity Supplied 1500 Firms
$26
32
38
41
46
56
66
e. Explain: "That segment of a competitive firm's marginal cost curve that lies above its average-variable-cost curve constitutes the short-run supply curve for the firm." Illustrate graphically.
f. Now assume that there are 1500 identical firms in this competitive industry; that is, there are 1500 firms, each of which has the cost data shown in the table. Complete the industry supply schedule (column 4).
g. Suppose the market demand data for the product are as follows:
What will be the equilibrium price? What will be the equilibrium output for the industry? For each firm? What will profit or loss be per unit? Per firm? Will this industry expand or contract in the long run?
Total Product Average Fixed Cost Average Variable Cost Average Total Cost Marginal Cost
1 $60.00 $45.00 $105.00 $45
2 30.00 42.50 72.50 40
3 20.00 40.00 60.00 35
4 15.00 37.50 52.50 30
5 12.00 37.00 49.00 35
6 10.00 37.50 47.50 40
7 8.57 38.57 47.14 45
8 7.50 40.63 48.13 55
9 6.67 43.33 50.00 65
10 6.00 46.50 52.50 75
Price Total Quantity Demandad
$26 17,000
32 15,000
38 13,500
41 12,000
46 10,500
56 9,500
66 8,000
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Solution:
Total Product Average Fixed Cost Average Variable Cost Average Total Cost Marginal Cost
1 $60.00 $45.00 $105.00 $45
2 30.00 42.50 72.50 40
3 20.00 40.00 60.00 35
4 15.00 37.50 52.50 30
5 12.00 37.00 49.00 35
6 10.00 37.50 47.50 40
7 8.57 38.57 47.14 45
8 7.50 40.63 48.13 55
9 6.67 43.33 50.00 65
10 6.00 46.50 52.50 75
a. At a product price of $56, will this firm produce in the short run? ...
Solution Summary
Solution describes the steps for calculating output and profit of perfectly competitive firm at different price levels. It also develops industry supply schedule and predicts the behavior of industry in long run.