Question

Assume that the following cost data are for a purely competitive producer Total Product Average Fixed Cost Marginal Cost na $ 45,00 $ 40,00 1 2 5 5 6 0.00 3 0.00 20.00 15.00 Average Average Total Variable Cost Cost 0.00 $ 0.00 $ 45,00 $ 105,00 $ 42.50 $ 72.50 $ 40.00 $ 60.00 $ 37.50 17 505 $ 5250 $ 37005 4 9.00 $ 3750 $ 4750 $ 38.575 $ 4063 $ 48.13 $ 4333 5 0.00 $ 46 50 $ 52.50 35 00 3000 S 1200 35.00 40.00 45.00 47.14 10.00 8.57 7.50 6.67 6.00 $ 5500 10 $ 75.00 Answer the questions in the first column in the table below for the price listed at the top of each of the other three columns Instructions: If you are entering any negative numbers be sure to include a negative sign in front of those numbers Select "Not applicable and enter a value of "o" for output if the firm does not produce

Answer 1

	At a product price of $56	At a product price of $41	At a product price of $32
Will a firm produce in the short run	Yes,	yes	Not applicable 0 ( as the firm will not produce, since P is < Minimum AVC of $37.
Profit-maximizing or loss-minimizing output	8 units (MR>MC)	6 units (MR >MC)	Not applicable 0 ( as the firm will not produce
Economic Profit per unit of output	$56-$48.13=$7.87 per unit profit	Loss. -$41-$47.50=$6.50.	Not applicable 0 ( as the firm will not produce
Profit-maximizing output for a perfectly competitive firm in the short run is P=MC.
The shut-down point is the minimum SAVC. A firm will supply as long as its minimum SAVC is covered. This will minimize the economic loss as the fixed costs are already incurred
Economic profit = Total revenue – total costs ( implicit + explicit)
At $56, applying P=MC, it will produce 8 units as MR (P=$56) exceeds MC of $55.
The ATC is $48.13, so economic profit per unit is $56-48.13=$7.87 per unit profit.
At $41, applying P=MC, it will produce 6 units as MR (P=$41) exceeds MC of $ 40..		.
The AVC is $37.50, the firm will produce in the short run because P > minimum AVC.
The ATC at 6 units of output is $47.50 which exceeds the Price. The firms will suffer a loss. The loss per unit is $47.50-$41=$6.50.
At price of $32 per unit, the firm will not produce as this is below the minimum AVC of $37 per unit. d) and e) MC cuts AVC from below at the minimum point on the AVC curve. Beyond that MC rises. It becomes the supply curve of the firm as the firm will produce when P > minimum AVC. Price $ Quantity supplied by single firm Profit or loss Quantity supplied by 1500 firms ( multiply the quantity supplied by a single firm by 1500 firms) 26 0 $-60 (loss) 0 32 0 $-60 (loss) 0 38 5 $-55(loss) 7500 41 6 $-39 (loss) 9000 46 7 $-8 (loss) 10500 56 8 $63 (profit) 12000 66 9 $144 profit 13500 f) Price $ Quantity demanded Quantity supplied 26 17,000 0 32 15,000 0 38 13,500 7500 41 12,000 9000 46 10,500 10500 56 9,500 12000 66 8,000 13500 Equilibrium price is $46. Equilibrium output is 10,500 Each firm will supply 7 units. Loss of $8 per firm ($1.14*7). Firms will exit as P<ATC, the industry will contract. At 7 units, ATC is $47.14 which is less than the equilibrium price of $46. e) MC cuts AVC from below at the minimum point on the AVC curve. Beyond that MC rises. It becomes the supply curve of the firm as the firm will produce when P > minimum AVC.