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Competitive seller decision making

3. Assume the following cost data are the purely competitive producer:

Total product Avg. Fixed Avg. Variable Avg. Total Marginal
Product Cost ($) Cost ($) Cost ($) Cost ($)
0 45.00
1 60.00 45.00 105.00 40.00
2 30.00 42.50 72.50 35.00
3 20.00 40.00 60.00 30.00
4 15.00 37.50 52.50 35.00
5 12.00 37.00 49.00 40.00
6 10.00 37.50 47.50 45.00
7 8.57 38.57 47.14 55.00
8 7.50 40.63 48.13 65.00
9 6.57 43.33 50.00 75.00
10 6.00 46.50 52.50

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? What economic profit or loss will the firm realize per unit of output?

b. Answer the relevant questions of 3a assuming the product price of $41.

c. Answer the relevant questions of 3a assuming the product price of $32.

4. 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).

(1) (2) (3) (4)
Price ($) Quantity supplied, Profit (+) Quantity supplied,
Single Firm or Loss (-) 1500 Firms

$26 ($)
32
38
41
46
56
66

a. Using the data in the table, 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).

b. Suppose the market demand for the product are as follows:

Price ($) Total quantity demanded
$26 17000
32 15000
38 13500
41 12000
46 10500
56 9500
66 8000

5. Why is the equality of marginal revenue and marginal cost essential for profit maximization? Explain why price can be substitute for marginal revenue in the MR = MC rule when an industry is purely competitive?

6. Explain: â??The short-run rule for operating or shutting down is P > AVC, operate; P < AVC shutdown. The long-run rule for continuing in business or exiting the industry is P >/ ATC, continue; P < ATC, exit.â?

Solution Preview

At a price of $56, the company will produce 7 units. It will not produce more because MC increases to $65 for eight units. At seven units, MC is $55 and company covers its AVC of $38.57 so it is preferable to produce. The profit maximizing output is always the greatest output at which the company can still cover its marginal cost. Profit at this level of output is found by subtracting ATC x Q from P*Q. This gives us $62.02 profit.

b. At a price of $41, the company will produce 5 units. It can cover its AVC of $37 and its loss is $40.

c. At price of $32, the company would produce 3 units if it could cover AVC. However AVC at this level is $40, so the company will not produce.

4.

(1) (2) (3) (4)

$26 0
32 0
38 4 -$58 6000
41 5 -$40 7500
46 6 $51 ...

Solution Summary

Production decision making in perfect competition

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