Question

A perfectly competitive fim has to incur the following costs in production: $30 as the cost associated with the fixed factors and S10 as the cost of each variable input. ) Complete the table below Units of variable Total product Total variableTota al costMarginal cost Average variable Average total factor 0 cost 0 10 20 30 40 cost cost 0 30 40 50 60 70 20 10 8.57 8.75 5 3.33 4 4.29 4 10 b) (0 Graph the marginal cost curve, average variable cost curve and average total cost curve together in the same diagram. (ii) The shutdown price of the firm is Draw the industry supply curve if there are 100 identical firms in the market. (ii) If the market price is S10, the production level of the fim is and the corresponding total amount of profit enjoyed by the fim is Describe what will happen in the long-run.

Answer 1

Part b i: Chart with AVC, MC and ATC is as follows:

25 15 10 ATC 8 Product Units

ii) The firm should shutdown if it is not able to meet the AVC at any level of output. So in the above table, if at each level of output the AVC is greater than the revenue, then the firm should shutdown.

As it is perfect competition, all firms are identical, the upward sloping part of the MC curve is the supply curve of one firm and as the market has 100 firms, we use horizontal summation method or just multiply the product units by 100 for each unit of production to achieve the industry supply curve:

Product units	MC
0
200	5
500	3.33
700	5
800	10

Industry Supply curve 12 10 800 Product Units 700 200 500

iii)

Units of variable factor	Product units	TVC	TFC	TC	MC	AVC	ATC	Price or AR	TR=AR x product units	Profit = TR-TC	MR = AR
0	0	0	30	30				10	0	-30
1	2	10	30	40	5	5	20	10	20	-20	10
2	5	20	30	50	3.3	4	10	10	50	0	10
3	7	30	30	60	5	4.29	8.6	10	70	10	10
4	8	40	30	70	10	5	8.8	10	80	10	10

So production will happen where MR=MC which is at 8 product units where profit is 10

In the long run:

• All costs will be variable, there wont be any fixed cost.
• New players will enter the market and the only normal profits will be earned, super normal profits will be eroded and the firms will produce where AR=MR=AVC=MC