Question

Introduction to Microeconomics Deriving the Short-Run Supply Curve for the Perfectly Competitive Firm MC ATC AVC Cost ($) 0 10 20 30 40 50 60 70 80 90 100 110 Outputs units) The figure illustrates the costs faced by a perfectly competitive firm. Use the figure to answer the following: 1) If the market price is $20, how much will the firm produce in order to maximize its profits? 2) If the market price is $15, how much will the firm produce in order to maximize its profits? 3) If the market price is $10, how much will the firm produce in order to maximize its profits? 4) If the market price is $8, how much will the firm produce in order to maximize its profits? 5) Based on the above, indicate on the graph, the short-run market supply curve for the perfectly competitive firm. 6) At what price will the firm shut-down? Will the firm leave the industry? Explain. 7) At what price does the firm break-even? 8) If the price is $10, what are the firm's profits?

Answer 1

Answer 1

AVC Cost ($) 0 10 20 30 40 80 90 100 110 50 60 70 Outputs units)

As at $20 the MC > ATC , Thus the firm is enjoying Profits. The firm will produce 100 units of output.

Answer 2

Cost 0 10 20 30 40 80 90 100 110 50 60 70 Outputs units)

As at $15 the MC = ATC , Thus the firm is at break even point i.e no profit no loss. The firm will produce 80 units of output, and will continue production in the short term

Answer 3

AVC Cost (5) 0 10 20 30 40 50 60 70 80 90 100 110 Outputs units)

As at $10 the MC = AVC , Thus the firm is at shut down point i.e is in loss but will continue production. The firm will produce 60 units of output.

Answer 4

AVC Cost (5) 0 10 20 30 40 80 90 100 110 50 60 70 Outputs units)

As at $8 the MC< AVC , Thus the firm is at shut down zone as it is unable to meet the variable cost. The firm will not produce any output

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