Yeah, so I'm in urgent need of help with this homework.
1. Assume that in a perfectly competitive market, a firm's costs and revenue are:
Marginal cost = average variable cost at $20
Marginal cost = average total cost at $30
Marginal cost = average revenue at $25
A) How will this firm determine the profit-maximizing level of output?
B) What price will this firm charge? Explain how the firm determined this price.
C) Should this firm produce in the short run? Why or why not?
D) Will this firm eart a profit or incur a loss? Why?
With your givens, I must assume that MC=AVC=20 at one PARTICULAR PRODUCTION LEVEL, and MC=ATC=30 at another PARTICULAR PRODUCTION LEVEL. Both statements cannot be true at the same production. So, I presume that the firm has a normal increasing marginal cost function. Further, it must be that for production above this particular level, MC=AVC at the minimum point of the AVC curve. So, at points to the right of this point, MC must be greater than AVC. Also, MC=ATC at the minimum point of the ATC curve.
Hint: a picture would be very helpful. Draw a firm with MC,AVC, and ATC curves, the MC curve cuts the AVC and ATC curves at their minimum point.
Since the firm is in a perfectly competitive market, MR=average revenue=Price -- for all levels of output. So....
A) produce where MC=MR -- and increase in production
C) Yes as MR > AVC, the firm is at least covering its variable costs.
D) No, at MR=25, MR < ATC -- the running at a loss.
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