Question

Assignment 6-Q1 SMC ATC Answer the following questions using the cost curves for a firm under perfect competition shown in the figure. 1. How do you draw a marginal revenue curve when the price of good is given at $3.0? 2. How many units should the firm produce? At the production level in 1 above, how much is average total cost? How much is the total cost? Calculate the profit at this production. Let the price fall to $1. How is a new marginal revenue curve drawn? At the new price level of $1, how many units should the firm produce? At the price of $1, how much is total revenue? Total cost? Total profit? At the new production level at the price of $1, how much is the total variable cost? How much is applied as recovery of fixed cost? At what price level will the firm stop production? Price and costs ($) AVC 1,000 3,000 4,000 2,000 Quantity (unit)

Please provide your answers and explanations. (No handwriting pls because it is so difficult to read..)

Thank you in advance.

Answer 1

1. For a perfectly competitive firm, P = MR = D. Price is constant and hence it is a horizontal straight line. SMC -P= MR=D ATC Price and costs ($) 0 1,000 3,000 4,000 2,000 Quantity (unit) 2. 4000 units of output.

For a perfectly competitive firm, output is determined at the intersection point of MC and MR curves. SMC P-MR Price and costs (5) 1,000 3,000 4,000 2,000 Quantity (unit) In the figure this equilibrium point is represented by point E. Output corresponding to this point is 4,000 units 3. At the production level in 1 above, average total cost ATC = $2 ATC = TC/Q TC = ATC*Q Q = 4000 ATC = $2 TC = 4000*2 = $8000 4. Profit = TR - TC Total revenue TR =PQ = 3*4000 = $12000 Total cost = $8000 Therefore, profit = 12000 - 8000 = $4000 Profit at this level = $4000

Price and costs (5) PMR =$1 0 1,000 3.000 4.000 2.000 Quantity (unit) 6. At the new price of $1, the firm should produce 2000 units

Price and costs (5) PMR=$1 0 1,000 3,000 4,000 2,000 Quantity (unit) This is determined by the intersection of MC curve with the MR curve. 7. At this production level of 2000 units, TR = PQ = 1*2000 = $2000 ATC = 1.5 TC = 2000*1.5 = $3000 Profit = TR - TC = 2000 - 3000 = -1000 That the firm incurs loss 8. AVC at new equilibrium output of 2000 units AVC = $0.5 AVC=TVC/Q TVC = AVC *Q TVC = 0.5*2000 = $1000 TC = FC + VC FC = TC-VC = 3000 - 1000 = 2000 $2000 is applied as recovery of fixed cost

9. At a price level of $0.4, the firm should stop production. This is the price which is just enough to cover the variable cost. Below this price, the firm will not be able to cover even the variable cost of production. Therefore below a price of $0.4 firm should stop production.