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?
Any help would be greatly appreciated, thanks!
Always always always where MC=MR
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
B) P=25
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.
Sure! I'd be happy to help you with your homework. Let's break down each question step by step:
A) To determine the profit-maximizing level of output, the firm needs to compare marginal cost (MC) with marginal revenue (MR). In perfect competition, MR equals the market price. The firm should continue producing until MC equals MR (or MC = P, where P is the market price). In this case, given that the marginal cost is equal to the average revenue (AR) at $25, the firm should produce until the marginal cost surpasses $25.
B) The price that the firm will charge is determined by the market, as the firm is a price-taker in perfect competition. The market price is equal to the marginal revenue (MR) and average revenue (AR). In this case, since marginal cost equals average revenue at $25, the firm should charge a price of $25.
C) In the short run, the firm should produce if its total revenue covers its variable costs (AVC). In this case, the marginal cost is equal to the average variable cost (AVC) at $20. Since the marginal cost is higher than the market price ($25), the firm should produce in the short run as long as it can cover its variable costs.
D) Whether the firm earns a profit or incurs a loss depends on the comparison between its total revenue and total costs. If its total revenue is higher than its total costs, it will earn a profit. Conversely, if its total costs exceed its total revenue, it will incur a loss. Since we don't have the information about the firm's total costs or quantities produced, we cannot determine whether it will earn a profit or incur a loss based on the given information alone.
I hope this helps! Let me know if you have any further questions.