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Behavior of a perfectly competitive firm

A manufacturer of electronics products is considering entering the telephone equipment business.
It estimates that if it were to begin making wireless telephones , its short-run cost functions would be as follows:

Quantity (Thousands) Average Variable Cost (AVC) Average Total Cost (ATC) Marginal Cost (MC)
9 $41.10 $52.21 $30.70
10 $40.00 $50.00 $30.10
11 $39.10 $48.19 $30.10
12 $38.40 $46.73 $30.70
13 $37.90 $45.59 $31.90
14 $37.60 $44.74 $33.70
15 $37.50 $44.17 $36.10
16 $37.60 $43.85 $39.10
17 $37.90 $43.78 $42.70
18 $38.40 $43.96 $46.90
19 $39.10 $44.36 $51.70
20 $40.00 $45.00 $57.10

a. Suppose the average wholesale price of a wireless phone is currently $50. Do you think this company
should enter the market? Explain.

b. Suppose the firm doesn't enter the market and that over time increasing competition causes the price to fall to $35.
What impact will this have on the firm's production levels and profits? Explain. What would you advise this firm to do?

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a. Suppose the average wholesale price of a wireless phone is currently $50. Do you think this company
should enter the market? Explain.

Let us see the marginal cost column. We find that MC is less than average price i.e. $50 for output level of 18 thousand units.
Optimal level of output should be 18 thousand units. Any increase in output from this level will pull down the ...

Solution Summary

Solution studies whether a company with the given cost structure should enter the competitive market at prevailing market price.

$2.19