Question

2. Suppose you are a consultant for a firm that is perfectly competitive. The fim is worried only about its policies in the short run. What would you recommend in terms of quantity changes (raise, cut, shut down, or stay put) and price changes (raise, cut, or stay put) in each of the following situations (a through e) P $34 MC $56 AVC $12 a. [4 points] P= $270 b. [4 points] MC $300 AVC= $300 P $ 15 MC $15 AVC $150 c. [4 points] MC $31 AVC = $311 P $316 d. [4 points] P $256 e. [4 points] MC $256 AVC = $266 price; MC = marginal cost; AVC average variable cost] [Notations/Abbreviations: P

Answer 1

eonsultant Jo, Ans2 Suppose you are perectiy competitive. Soluton AVe $12 56 P 34, Mc - egter Ятеateт than price ( Mesp) and uankity ireaer Shaulod not be shutdswn. As mcp prodi decrease output than Avc MC>AVC), MCis eas,Tase -he price ond Therefoe, auantiy TOISE and price Cut P 270 Mc 300 Ave 300 As Pis ass \han Mc and Avc (p<MC &P <AVC) S0 too muh 1 con increole Profiuly oy decreasig ouput, eur and price -cut im shauld ist he markeh. Therefore, auantity hus the Mc 15 AVC2150 Ave is Juis than price and the im uiull be able increase in auantity produce. AS Cast t recoveo ils Me uNth hereert, auantity paoca-Sy put Taús e and P 316 Me 2 $31l ArC 311 reater thon Me and Ave prouian herort, auantity-qaise and price- stay put Price 1s The irm increase profjks eaan

2 66 256 AVC 2 Pa256 MC 2 As pace and Mc s less than Avc. Therefor, rm shut down, Becase the pice chorgëd is not subent to corer up AVe Thuauanty same and price and MC shut down endl price- cut