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# Short run equilibrium & units of output

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If the total cost schedule for a perfectly competitive firm is and if market price is \$60, how many units of putput will the firm produce?

a. 0 units of output because the firm shuts down
b. 2 units of output
c. 3 units of output
d. 4 units of output
e. none of the above

Output Total Cost
0 \$10
1 60
2 80
3 110
4 165
5 245

A firm is in the short run competitive equilibrium. The price of a substitute item increases

a. The product price will rise
b. New firms wil lenter the market
c. Firms will begin earning economic profit
d. a & b
e. All of the above

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#### Solution Preview

1. d.
Because Marginal cost of the 4th output is \$55, and that of the 5th is 80. The firm will choose to produce when marginal cost = ...

#### Solution Summary

The solution answers the question(s) below.

\$2.19

## Profit Maximization in perfectly competitive environment

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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