Question

Solve: Assume this is a perfectly competitive market. Answer the following questions and explain your answers. 1. Complete the table. e VC AFC AVC ATC MC TCFC $6.50 $9.50 2 4 $10.50 $12.50 $11.50 $13.50 $14.50 $18.00 $22.00 $26.50 $31.50 2. Assume that the market price is $3.50: What is the profit-maximizing level of output for this firm? What is the dollar amount of the profit, or loss? 4. What would happen with the number of firms in this market if the price drops to $3.00? Why? 5. What would be the economic profit, or loss, for this firm if the fixed cost increases by $1.50 and the market price remains at $3.50? 6. What is the long-run equilibrium price for this company? 7. What is the shut-down price for this company?

Answer 1

1.

Q	TC	FC	VC=TC-FC	AFC=FC/Q	AVC=VC/Q	ATC=TC/Q	MC=change in TC/change in Q
0	6.50	6.50	0.00
1	9.50	6.50	3.00	6.50	3.00	9.50	3.00
2	10.50	6.50	4.00	3.30	2.00	5.30	1.00
3	11.50	6.50	5.00	2.20	1.70	3.80	1.00
4	12.50	6.50	6.00	1.60	1.50	3.10	1.00
5	13.50	6.50	7.00	1.30	1.40	2.70	1.00
6	14.50	6.50	8.00	1.10	1.30	2.40	1.00
7	18.00	6.50	11.50	0.90	1.60	2.60	3.50
8	22.00	6.50	15.50	0.80	1.90	2.80	4.00
9	26.50	6.50	20.00	0.70	2.20	2.90	4.50
10	31.50	6.50	25.00	0.70	2.50	3.20	5.00

2.

At, Price = 3.5, the profit maximising level of output is 7
The dollar amount of profit or loss is $6.5

4.

The number of firms will not reduce but the amount of profit gets reduced to $3.5

Q	TC	TR	Profit
0	6.5	0.00	-6.50
1	9.5	3.00	-6.50
2	10.5	6.00	-4.50
3	11.5	9.00	-2.50
4	12.5	12.00	-0.50
5	13.5	15.00	1.50
6	14.5	18.00	3.50
7	18.0	21.00	3.00
8	22.0	24.00	2.00
9	26.5	27.00	0.50
10	31.5	30.00	-1.50

5.

Q	TC	TR	Profit
0	8.00	0.00	-8.00
1	11.00	3.50	-7.50
2	12.00	7.00	-5.00
3	13.00	10.50	-2.50
4	14.00	14.00	0.00
5	15.00	17.50	2.50
6	16.00	21.00	5.00
7	19.50	24.50	5.00
8	23.50	28.00	4.50
9	28.00	31.50	3.50
10	33.00	35.00	2.00

Profit gets reduced to $5

6. Long run equilibrium price is the minimum ATC which is $2.4

7. The shut down price is minimum AVC which is $1.3