Question

CHAPTER 8- PERFECT COMPETITION-PRACTICE PROBLEMS 2 Assume the following cost data are for a purely competitive producer Total Cost Cost 45 1 $4000 $45.00 $105.00 2 0.00 3 20.00 15.00 12.00 10.00 857 7.50 7250 6000 52.50 49.00 47 50 47.14 48.13 50.00 52.50 30 35 7.50 37.00 7.50 3.33 75 a. At a product price of $56, will this firm produce in the short run? If it is preferable to produce, what will be the profit-maximizing or loss-minimizing output? What economic profit or loss will the firm realize per unit of output? b. Answer the questions of 4a assuming product price is $41. c. Answer the questions of 4a assuming product price is $32. d. In the table below, complete the short-run supply schedule for the firm (columns 1 and 2) and indicate the profit or loss incurred at each output (column 3). Quantity (I) Supplied, Proit (+) Supplied Price Single Firm or Los () 1500 Firms 56 e. Now assume that there are 1500 identical firms in this competitive industry; that is, there are 1500 firms, each of which has the cost data shown in the table. Complete the industry supply schedule (column 4) f. Suppose the market demand data for the product are as follows:

Answer 1

a. Yes, $56 exceeds AVC (and ATC) at the profit-maximizing output. Using the MR = MC rule it will produce 8 units. Profits per unit = $7.87 (= $56 - $48.13); total profit = $62.96.

b. Yes, $41 exceeds AVC at the loss—minimizing output. Using the MR = MC rule it will produce 6 units. Loss per unit or output is $6.50 (= $41 - $47.50). Total loss = $39 (= 6 ¥ $6.50), which is less than its total fixed cost of $60.

c. No, because $32 is always less than AVC. If it did produce according to the MR = MC rule, its output would be 4—found by expanding output until MR no longer exceeds MC. By producing 4 units, it would lose $82 [= 4 ($32 - $52.50)]. By not producing, it would lose only its total fixed cost of $60.

d. Column (2): Quantity supplied, single firm: 0, 0, 5, 6, 7, 8, 9

Column (3): Profit or Loss: - 60, - 60, - 55, - 39, - 8, 63, 144

e. Column (4): Quantity supplied, 150 firms: 0, 0, 7500, 9000, 10500, 12000, 13,500

f. Equilibrium price = $46; equilibrium output = 10,500. Each firm will produce 7 units. Loss per unit = $1.14, or $8 per firm. The industry will contract in the long run.