Question

$10.. ATC AVC 8 7 2 1 2 3 4 5 6 789 10 Quantity (in 1,000s)

Part 1

1. At a market price of $7, what is the Marginal Revenue for this firm?
2. At a market price of $7, what is the Average Revenue for this firm?
3. At a price of $7 how many units will this firm produce in the short run to maximize profit? (Round off your answer to the nearest 100 units)
4. What is the cost per unit? (See ATC)
5. What will be its profit or loss per unit?

Part 2

1. At a market price of $5.50, what is the Marginal Revenue for this firm?
2. At a market price of $5.50, what is the Average Revenue for this firm?
3. At a price of $5.50 how many units will this firm produce in the short run to maximize profit?
4. What is the cost per unit? (See ATC)
5. What will be its profit or loss per unit?

Part 3

1. At a product price of $3, how does Marginal Revenue compare to Average Variable Costs?
2. At a product price of $3 will it produce any units? If not, why not?
3. If many firms leave the market how will this affect the market price?

Part 4

If all firms in the industry have the same configuration:

1. In the long run what will be the equilibrium market price?
2. In the long run, what will be the equilibrium market quantity, each firm will sell?

Answer 1

PART 1

(a)

The market price is $7.

When the market price is given then in that case market is a perfectly competitive market.

In perfectly competitive market, price is always equal to the marginal revenue.

So,

At a market price of $7, the marginal revenue for this firm is $7.

(b)

Average revenue is always equal to Price.

So,

At a market price of $7, the average revenue for this firm is $7.

(c)

A perfectly competitive firm maximizes profit when it produce that level of output corresponding to which price equals marginal cost.

At a market price of $7 per unit, price equals MC corresponding to the output of 6,500 units.

So,

This firm will produce 6,500 units in the short run to maximize the profit.

(d)

Corresponding to the output of 6,500 units, average total cost is $5.50.

Thus,

The cost per unit is $5.50.

(e)

Calculate the profit per unit -

Profit per unit = Market price - ATC

Profit per unit = $7 - $5.50 = $1.50

Thus,

The profit per unit is $1.50.