Question

Suppose you are a consultant for a firm that is perfectly competitive. The firm 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): a. [4 points] P = $34 MC = $56 AVC = $12 b. [4 points] P = $270 MC = $300 AVC= $300 c. [4 points] P = $ 151 MC = $151 AVC = $150 d. [4 points] P = $316 MC = $311 AVC = $311 e. [4 points] P = $256 MC = $256 AVC = $266 [Notations/Abbreviations: P = price; MC = marginal cost; AVC = average variable cost]

Answer 1

Ans. We know that In perfect competition , Price = Marginal Revenue ie P = MR

a. Quantity should be raised because Marginal Revenue is less than Marginal Cost .

b. Firm should shut down because AVC > MC ie firm is not even able to cover it's average cost.

c. Firm should stay put because here MR = MC

d. Quantity should be decreased because MR > MC

e. Firm should shut down because it's not able to cover even it's Variable Cost.

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