Question

1. Use the table below to solve the following questions regarding a pure competition industry.

1. If the product has a price of $1.85, what is the Marginal Revenue?
2. At the Marginal Revenue above, will the company be making a profit?
3. Will the company do business in the long-run, short-run, or shut down immediately?

Output	Total Costs	Fixed Costs	Variable Costs	AFC	AVC	ATC	MC	MR
0	200	200	0
100	300	200	100	2.00	1.00	3.00	1.00
150	400	200	200	1.33	1.33	2.67	2.00
205	500	200	300	0.98	1.46	2.44	1.82
300	600	200	400	0.67	1.33	2.00	1.05
395	700	200	500	0.51	1.27	1.77	1.05

Answer 1

a)

Given Price=$1.85

In case of pure competitive market, P=Marginal Revenue, So,

Marginal Revenue=$1.85

b)

A perfectly competitive firm increases its production if MC<MR or MC=MR to maximize profit.

In this case MC<MR for 395 units, we assume that no further output is possible.

So, optimal output =395 units

At this output level ATC ($1.77) <MR ($1.85). Firm is making a profit at this Marginal Revenue.

c)

Firm is making a profit in current situation. Firm will continue its operate till price is equal to minimum ATC i.e. $1.77 in long run.