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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?

#### Solution Preview

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