Posted by nika on Thursday, November 8, 2012 at 2:17pm.
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.
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