Explore BrainMass
Share

# Explain allocative and productive efficiency in competitive

A perfectly competitive firm is operating in a market where price is given as \$20 and the cost of production is as shown on the table below:

Q P TR MR FC VC TC MC AFC AVC P/L
0 20 10 10
1 20 10 18
2 20 10 25
3 20 10 35
4 20 10 55
5 20 10 90__________________________________

a. Find the values of TR, MR, VC, TC, MC, AFC, AVC, P/L
b. Is this firm a profit max., loss min., or a close-down case.
d. Would the situation in '2' above change if the price was as given below:
a. \$ 7
b. \$10
c. \$15
What would be the decision of the firm in each case? (Closing down, loss minimizing, profit maximizing)
Construct a table showing short-term supply for the firm at the different competitive prices given in '4' above?
Construct a table assuming ten identical firms (same cost) in the market (also called industry in macroeconomics)

a) What is the relationship between the MC and short-run supply curve.
b) Why is the profit for the competitive firm zero in the long- run?
c) Explain the shapes of the long-run supply curve for:-
i. Increasing cost industry
ii. Constant cost industry
iii. Decreasing cost industry
d) Why is the consumer better off with a competitive firm than with a monopoly in the long-run? Explain the answer in terms of ATC, MC, and Prices?
e) Explain allocative and productive efficiencies for the purely competitive firm.

#### Solution Preview

See the attached file for complete solution. The text here may not be copied exactly as some of the symbols / tables may not print. Thanks

A perfectly competitive firm is operating in a market where price is given as \$20 and the cost of production is as shown on the table below:

Q P TR MR FC VC TC MC AFC AVC P/L
- 20.00 - 10.00 10.00 20.00
1.00 20.00 20.00 20.00 10.00 18.00 28.00 8.00 10.00 18.00 (8.00)
2.00 20.00 40.00 20.00 10.00 25.00 35.00 7.00 5.00 12.50 5.00
3.00 20.00 60.00 20.00 10.00 35.00 45.00 10.00 3.33 11.67 15.00
4.00 20.00 80.00 20.00 10.00 55.00 65.00 20.00 2.50 13.75 15.00
5.00 20.00 100.00 20.00 10.00 90.00 100.00 35.00 2.00 18.00 -

a. Find the values of TR, MR, VC, TC, MC, AFC, AVC, P/L
See the above table
b. Is this firm a profit max., loss min., or a close-down case.
Since firm is able to make positive profits, it is a profit max case

d. Would the situation in '2' above change if the price was as given below: What would be the decision of the firm in each case? (Closing down, loss minimizing, profit maximizing)
a \$7
Q P TR MR FC VC TC MC AFC AVC P/L
- 7.00 - 10.00 10.00 20.00
1.00 7.00 7.00 7.00 10.00 18.00 28.00 8.00 10.00 18.00 (21.00)
2.00 7.00 14.00 7.00 10.00 25.00 35.00 7.00 5.00 12.50 (21.00)
3.00 7.00 21.00 7.00 10.00 35.00 ...

#### Solution Summary

Solves a comprehensive problem on production function. The solution contains both text and Excel file so that you can learn and see the formulas in Excel file.

\$2.19