Share
Explore BrainMass

Cost-Benefit Analysis - Perfect competition

Use the table below to answer the following questions:

Table
Output Total Cost
0 $10
1 $20
2 $28
3 $38
4 $53
5 $73
6 $99

a. What are variable costs of producing 5 units?
b. What is average total cost of producing 3 units?
c. What is average fixed cost of producing 4 units?
d. What is the marginal cost of producing the 2nd unit?
e. What are fixed costs?
f. What is average variable cost of producing 1 unit?

State whether the following describes MC(marginal cost), ATC(average total cost), AVC(average variable cost), or AFC(average fixed cost). Some statements may describe more than one cost curve.
a. Cost continuously decline as output rises
b. Always lies above the AVC curve
c. First declines as quantity increases, but then increases as quantity increases.
d. Cuts the ATC and AVC at their minimum points.

Task 1. Member _________. Suppose your team constructed a list of the following conditions of a perfectly competitive market. Circle those that he got correct and fix those that he got wrong.

There are many barriers to entry. Firms are price makers.

Firms' products are differentiated. There is complete information.

Firms maximize market share. The number of firms is large

Tasks 2. Member ________. Given the marginal cost information below, answer the following questions:

Output Marginal Costs
1 15
2 12
3 20
4 27
5 34
6 40
7 47

a. The firm can sell a helmet for $34 and the firm is producing 6 helmets. Would increasing output increase or decrease profit?
b. The firm can sell a helmet for $34 and the firm is producing 4 helmets. Would increasing output increase or decrease profit?
c. The firm can sell a helmet for $34. What is the profit-maximizing level of output?

Task 3. Member _________. Why is the marginal revenue for a firm in perfect competition equal to the market price?

Task 4. Member_______. Briefly explain why the following statements are either Ture or False:
a. Perfectly competitive firms can never earn economic profit.
b. Perfectly competitive firms seek to maximize both per-unit and total profit.
c. Sometimes, profit-maximization is the same as loss-minimization.
d. The marginal cost curve, above the minimum AVC, is the supply curve for the perfectly competitive firm.

Solution Preview

1) We have,
Table
Output Total Cost
0 $10
1 $20
2 $28
3 $38
4 $53
5 $73
6 $99
(a) Variable cost of producing 5 output:
Total cost of producing 5 output=$73
Fixed cost=Cost of producing 0 unit=$10

Therefore,
Variable cost of producing 5 units=$73-$10=$63

(b) Average total cost of producing 3 units:
Total cost of producing 3 units=$38
Therefore,
Average cost of producing 3 units=$38/3=$12.67

(c) Average fixed cost of producing 4 units:
Fixed cost of producing 4 units=$10
Therefore,

Average fixed cost of producing 4 units=$10/4=$2.50

(d) Marginal cost of producing the second unit:
Total cost of producing first unit=$20
Total cost of producing second unit=$28
Therefore,
Marginal cost of producing second unit=$28-$20=$8

(e) Fixed Cost:
Fixed cost is the cost that firm has ...

Solution Summary

This solution answers the question asked in this posting.

$2.19