Purchase Solution

# Calculating the equilibrium price/output in the given case

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A competitive firm's short-run cost information is shown in the table below.

Output Marginal Cost Average Variable Cost Average Total Cost
0
1 \$ 8.00 \$ 8.00 \$ 17.00
2 7.00 7.50 12.00
3 6.00 7.00 10.00
4 5.00 6.50 8.75
5 6.00 6.40 8.20
6 7.00 6.50 8.00
7 8.00 6.71 8.00
8 9.00 7.00 8.13
9 10.00 7.33 8.33
10 11.00 7.70 8.60

a. If the market price is \$5.25, how much will this firm produce? Enter in the second column of the table below. Repeat for the remaining prices shown in the table.
b. Fill in the next column to determine the market supply in this industry, assuming there are 2000 identical firms in the industry. Further suppose that the market demand schedule for this industry is given by the last column in the table.

Price Quantity Supplied, This Firm Quantity Supplied, 2000 Firms Quantity Demanded
\$ 5.25 20,000
\$ 6.25 18,000
\$ 7.25 16,000
\$ 8.25 14,000
\$ 9.25 12,000
\$ 10.25 10,000

c. What is the equilibrium quantity in this market?
d. What is the equilibrium price in this market?
e. What are the resulting output, revenue, cost, and profit of the typical firm?

##### Solution Summary

Solution describes the steps to calculate the output of the firm at various price levels. It also determines the equilibrium price and output of the market.

##### Solution Preview

a. If the market price is \$5.25, how much will this firm produce? Enter in the second column of the table below. Repeat for the remaining prices shown in the table.

A competitive firm sets its output level such that Marginal cost is less than or equal to market price. At a price of \$5.25, firm can choose to produce 4 units as marginal cost for 4th units is less than price of \$5.25. But AVC is more than price, firm will prefer to shut down to minimize the losses in the short run.

Similar is the case for price of \$6.25.
In case of price is \$7.25, firm will produce ...

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###### Education
• BEng (Hons) , Birla Institute of Technology and Science, India
• MSc (Hons) , Birla Institute of Technology and Science, India
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