Question

13. The table on the left sets out the market demand schedule for tapes, and the table on the right shows the cost structure of a perfectly competitive firm. There are 1,000 firms in the industry. Price Quantity Demanded Output MC AVC ATC 15.47 6.4 12.8 3.65 4.40 5.20 6.0 7.6 8.4 9.2 7.65 11 10.43 10.06 10 500,000 475,000 450,000 425,000 375,000 350,000 325,000 300,000 275,000 250,000 225,000 200,000 175,000 150,000 12.4 10.22 12.7 10.8 11.6 12.4 13.2 14 14.8 13.1. What is the market price? 13.2. What is the industry's output? 13.3. What is the output of each firm? 13.4. What is the economic profit of each firm? What is the shutdown point? What is the long run equilibrium price? You can assume that the above ATC applies to both short run and long run. Conceptually, in the long run, the column AVC disappears. Graphically, the amount of K in both the long run and the short run is the same. 13.7. What is the number of firms in the industry?

Answer 1

A competitive firm will set its output level such that MC=P to maximize profit.

A firm will shut down if AVC<Price. So, given firm will operate only if P is $7 or higher

Market supply will be equal to summation of output of all firms at that price level.

Market supply can be summarized as under

MC=P	Output of a firm, q	Qs= 1000*q
<7	0	0
7	250	250000
7.65	300	300000
8.4	350	350000
10	400	400000
12.4	450	450000
12.7	500	500000

13.1)

Market price at which quantity demanded is equal to quantity supplied. In this case, we find that

Qd=Qs=350000 at P=$8.40

Market price is $8.40

13.2)

We have seen in part 13.1 that at market price Qs=350000

So, industry output is 350,000 units

13.3)

Output of each firm is 350 units at a market price (Refer to above table)

13.4)

Profit of each firm=(P-ATC)*q=(8.40-10.06)*350=-$581

13.5)

Shut down point is equal to minimum AVC.

Shutdown point=Minimum AVC=$7

13.6)

Long run price=Minimum ATC=$10

13.7)

Quantity demanded at P=$10 is 300,000

Output of each firm is 400 units at P=$10

So, number of firms in long run=quantity demanded/output of a firm=300000/400=750