Question

Really really confused about this problem.Please tell me the answer as specific as possible!Thanks!

2. Answer the following based on the table below which is the cost of one of many identical firms in a perfectly competitive market. Assume the good can only be produced in whole quantities (ie q = 4.7 not possible). All given numbers in the table are exact. (No rounding). Also assume that the amount of capital the firm is stuck with in the SR to make this table is the unique amount that minimizes LRAC. Q FC VC TC MC NA AVC NA AFC ATC NA NA 67.75 284 414 22.6

Answer 1

Some of the cost related concepts:

TC = FC + VC

ATC = AFC + AVC

ATC = TC/Q

AFC = FC/Q

AVC = VC/Q

MC-S70_ ܘܠ 05ܠ

Using these equations we can find out the missing values in the table

FC VC 248 2487 TC 0 M C 248 NA 255 238 AVC NA 7 248 5 5 248 23 271 284 AFC ATC NA NA 7 248 255 124 119 5 82.67 77.67 5.75 62 67.75 49.6 56.8 7.2 41.33 50.67 9.33 35.43 47.43 12 31 46 15 27.56 46 22.6 47.4 7.2 304 28 248 248 248 84 120 166 332 368 414 474 46 248 24.8

Use the value of AVC to find the value of VC (VC=AVC*Q)

Use the value of ATC to find the value of TC (TC=ATC*Q)

FOR Q=5, values of TC and VC becomes available. Use this information to calculate the value of FC(FC=TC-VC)

Fixed cost remains constant for all quantities(FC for all quantity= 248)

Use the value of FC and VC to calculate TC(TC=FC+VC)

Use the value of FC and TC to calculate VC(VC=TC-FC)

Use MC to calculate VC (VC of previous quantity = VC of present quantity + MC)

b) At profit maximising equilibrium, Price = MR = MC

Short-run profit maximising quantity of output is at Q = 2,TC at Q = 2 is $238 and TR at Q = 2 is $8.

Profit = TR-TC = $8 - $238 = $-230.

c) At price = $26 Quantity demanded = 300. Profit is maximised at Price = MC

MC= $26 before 7 units of quantity. We take 6 units to be the profit maximising quantity produced by a single firm. 50 firms will be required to produce 300 units, ie, the total amount of the commodity demanded.

d) In the long run, all inputs available to the firm is variable. Therefore, there is no AVC OR AFC. We use MC and AC in the long run. In the long run, when firms make a profit there will be an entry of new firms in the market. As a result, the total commodity supplied in the market will go up and the price of the commodity will fall down. As the price of the commodity falls down, some firms will leave the market and the price of the commodity will increase. The process will continue until the price of the commodity is such that no profits are earned by the firms. This takes place at AC = MC. In the long-run equilibrium for the firm is established at AC = MC.

This happens at Q=9, where, AC = MC = 46. The market demand at P=46 is 216 units. As each firm produces 9 units of the commodity at equilibrium, 29 firms will be required to produce the entire market demand.

e)

Market supply 5 Price Marka 9 Quantity 216 Quantity