Question

Question Consider three firms, A, B and C, all producing kilos of potatoes (per year) in a perfectly competitive market. The diagrams below show marginal cost curves for each of the three firms. Firm Firm Quantity MCC MC 2 200 200 300 900 Quantity of potatoes S000 Qty of pro 800 800 Quantity of potatoes a) Suppose each of Firms A, B, and C are producing 500 kilos of potatoes. Is Firm A productively efficient? Why? b) Suppose each of Firms A, B, and Care producing 500 kilos of potatoes. Is this industry productively efficient? Why? c) Suppose each of Firms A, B, and C are producing 500 kilos of potatoes. Is this industry allocatively efficient? Why? d) Suppose each of Firms A, B and Care producing 500 kilos of potatoes. Keeping total output unchanged, what level of output should each firm be producing such that the industry is productively efficient? (Fill-in-the-blank. No explanation required) Firm A: kilos Firm B kilos Firm C: kilos

Answer 1

a.

Answer: No

The production at the minimum cost is the criterion.

Firm A cannot able to produce at the minimum cost, since it produces at $4 cost where the minimum cost is $2 achieved by the firm B.

b.

Answer: No

Since all the firms are not able to produce at the minimum cost, the industry is not productively efficient.

c.

Answer: No

The criterion of this efficiency is the equality of price and MC; (P = MC). Since MCs are not equal, few price taking firms (fixed price) may suffer with lower price, since they have higher costs compared to those lowers.

d.

Answers:

A: 500

B: 800

C: 200

Total production would be (500 × 3 =) 1,500 kilos.

The production at the minimum cost should be searched here; it is possible at $4 MC in each case; therefore, the corresponding units are 500, 800, and 200 (making the aggregate of 1,500).