The graph on the left shows the short-run marginal cost curve for a typical firm selling in a perfectly competitive industry. The graph on the right shows current industry demand and supply.



a. What is the marginal revenue that this perfectly competitive firm will earn on its 60th unit of output?
b. What level of output should this firm produce in order to maximize profit or minimize losses? (This isn’t two questions; the same level of output would do either.)
c. Given your answer to question (b) above, assume that ATC at that level of output is $10. What are the firm’s profits?
d. Now assume that the firm produces 100 units of output and at that level of output ATC = $11. How many firms in total will there be in this market?
e. Finally, assume the firm produces 100 units of output and at that level of output its ATC are $13 but its AVC are $11. What should the firm do and why?

a. What is the marginal revenue that this perfectly competitive firm will earn on its 60th unit of output?

The graph on the right side illustrates a demand curve, which intersects at a price level of $12 per unit. This is equilibrium price. In case of perfectly competitive firm, marginal revenue is equal to market price. So, Marginal Revenue at 60th units = $12.

b. What level of output should this firm produce in order to maximize profit or minimize losses? (This isn’t two questions; the same level of output would do either.)

The firms demand = MR = P is a horizontal line at $12. The firm will produce 100 units of output where SMC = $12.

c. Given your answer to question (b) above, assume that ATC at that level of output is $10. What are the firm’s profits?

Total Cost = ATC * output level = 10 * 100 = $1000
Total Revenue = Price * output = 12 * 100 = $1200
Profit = Total Revenue - Total Cost = 1200 – 1000 = $200
Firm profit is $200.

d. Now assume that the firm produces 100 units of output and at that level of output ATC = $11. How many firms in total will there be in this market?

Refer to demand and supply curve, we get equilibrium output level is 5000 units.
Number of firms = Total output / output of single firm = 5000 / 100 = 50
There will be 50 firms in the market

e. Finally, assume the firm produces 100 units of output and at that level of output its ATC are $13 but its AVC are $11. What should the firm do and why?

In case of short run, a firm will continue to produce of AVC is less than price. In the given case,
AVC = $11
Price = $12
Since AVC < Price, firm should continue to produce.

a. To find the marginal revenue of the 60th unit of output for a perfectly competitive firm, we need to understand that in a perfectly competitive market, the firm is a price taker and faces a horizontal demand curve. Marginal revenue (MR) is equal to the market price, which in this case is determined by the intersection of industry demand and supply curves. So, we need to look at the graph on the right to determine the price at the quantity of 60 units.

b. To find the level of output that maximizes profit or minimizes losses for a perfectly competitive firm, we need to find the quantity at which marginal cost (MC) equals marginal revenue (MR). In the graph on the left, we need to find the quantity where the MC curve intersects the MR curve. This quantity represents the profit-maximizing output level for the firm.

c. Once we have determined the profit-maximizing output level from question (b), we can find the firm's profit by subtracting the average total cost (ATC) from the price received per unit (which can be determined from the intersection of industry demand and supply). Profit = (Price - ATC) * Quantity.

d. To determine the total number of firms in the market when the firm produces 100 units of output at an ATC of $11, we need to consider that in the long run, firms in a perfectly competitive market will enter or exit until economic profits are zero. If the firm's ATC is $11 at 100 units of output, it means that the firm is making a positive economic profit. This will attract other firms to enter the market. In the long run, the number of firms will increase until the economic profit is driven down to zero.

e. If the firm produces 100 units of output and its ATC is $13, but its AVC (average variable cost) is $11, the firm is incurring losses. In this case, the firm should shut down and produce zero units of output in the short run. This is because the firm's total variable costs (TVC) will be higher than the total revenue (TR) it can generate from selling the output, leading to even greater losses. It would be more economically efficient for the firm to temporarily halt production to minimize its losses.