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Long Run costs and Output Decisions

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

1. The following problem traces the relationship between firm decisions, market supply, and market equilibrium in a perfectly competitive market.

a. Complete the following table for a single firm in the short run:

Output TFC TVC TC AVC ATC MC
0 $300 0
1 100
2 150
3 210
4 290
5 400
6 540
7 720
8 950
9 1240
10 1600

b. Using the information in the table, fill in the following supply schedule for this individual firm under perfect competition, and indicate profit (positive or negative) at each output level. Hint: at each hypothetical price, what is the MR of producing one more unit of output? Combine this with the MC of another unit to figure out the quantity supplied.

Price Quantity Supplied Profit
$50
70
100
130
170
220
280
350

c. Now suppose there are 100 firms in this industry, all with identical cost schedules. Fill in the market quantity supplied at each in this market:

Price Market Quantity Supplied Market Quantity Demanded
$50 1,000
70 900
100 800
130 700
170 600
220 500
280 400
350 300
d. Fill in the blanks: From the market supply and demand schedules in c., the equilibrium market price for this good is _____ and the equilibrium market quantity is ____. Each firm will produce a quantity of ___and earn a ___(profit/loss) equal to ____.

e. In d., your answers characterize the short run equilibrium in this market. Do they characterize the long-run equilibrium as well? If yes, explain why. If no, explain why not (that is, what would happen in the long run to change the equilibrium and why?)

Solution Summary

This post answers four questions on long term costs and output decisions in microeconomics. Could be used as a good practice for the exam preparation.

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