Question

i Saved Problem 9-4 (Algo) Assume that the following cost data are for a perfectly competitive producer: Total Product 0 1 2 3 4 Average Fixed Average Average Total Cost Variable Cost Marginal Cost Cost na $ 0.00 $ 0.00 na $ 60.00 $ 45.00 $ 105.00 $ 45.00 $ 30.00 $ 4250 $ 72.50 $ 40.00 $ 20.00 $ 40.00 $ 60.00 $ 35.00 $ 15.00 $ 37.50 $ 52.50 $ 30.00 $ 12.00 $ 37.00 $ 49.00 $ 35.00 $ 10.00 $ 37.50 $ 47.50 $ 40.00 $ 8.57 $ 38.57 $ 47.14 $ 45.00 $ 7.50 $ 40.63 $ 48.13 $ 55.00 $ 6.67 $ 43.33 $ 50.00 $ 65.00 $ 6.00 $ 46.50 $ 52 50s 75.00 5 6 7 8 9 10 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: Round your answers to 2 decimal places. If you are entering any negative numbers be sure to include a negative sign-

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 Not applicable 0 ( as the firm will not produce, since P is < Minimum AVC of $37. Yes, yes 6 units (MR >MC) Profit-maximizing or loss- minimizing output Economic Profit per unit of output 8 units (MR>MC) $56-$48.13=$7.87 per unit profit Not applicable 0 ( as the firm will not produce Not applicable 0 (as the firm will not produce Loss. -$41-$47.50=$6.50. 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. Quantity supplied by 1500 firms ( multiply the quantity supplied by a single firm by 1500 firms) Price $ Quantity supplied by single firm 0 26 0 32 0 0 38 5 7500 Profit or loss $-60 (loss) $-60 (loss) $-55(loss) $-39 (loss) $-8 (loss) $63 (profit) $144 profit 41 6 9000 46 7 10500 56 8 12000 66 9 13500 f) Price $ Quantity supplied 0 26 32 0 38 7500 Quantity demanded 17,000 15,000 13,500 12,000 10,500 9,500 8,000 41 9000 46 56 10500 12000 13500 66 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 more 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.