Solution) Assume the following cost data are for a purely competitive producer: Total Product Aver

Question: Assume the following cost data are for a purely competitive producer:


Total Product	Average fixed cost	Average variable cost	Average total cost	Marginal cost


0 1 2 3 4 5 6 7 8 9 10	$60.00 30.00 20.00 15.00 12.00 10.00 8.57 7.50 6.67 6.00	$45.00 42.50 40.00 37.50 37.00 37.50 38.57 40.63 43.33 46.50	$105.00 72.50 60.00 52.50 49.00 47.50 47.14 48.13 50.00 52.50	$45 40 35 30 35 40 45 55 65 75

a. At a product price of $56, will this firm produce in the short run? Why or why not? If it is preferable to produce, what will be the profit maximizing or

loss minimizing output? Explain. What economic profit or loss will the firm realize per unit of output?

b. Answer the relevant questions of 4a assuming product price is $41.

c. Answer the relevant questions of 4a assuming product price is $32.

d. In the table below, complete the short-run supply schedule for the firm (columns 1 and 2) and indicate the profit or loss incurred at each output (column 3).


(1) Price	(2) Quantity supplied, single firm	(3) Profit (+) or loss (l)		(4) Quantity supplied, 1500 firms


$26 32 38 41 46 56 66	____ ____ ____ ____ ____ ____ ____	$____ ____ ____ ____ ____ ____ ____	____ ____ ____ ____ ____ ____ ____

e. Explain: That segment of a competitive firm’s marginal cost curve which lies above its average‘s variable cost curve constitutes the short run supply curve for the firm. Illustrate graphically.

f. Now assume there are 1500 identical firms in this competitive industry; that is, there are 1500 firms, each of which has the same cost data as shown here. Calculate the industry supply schedule (column 4).

g. Suppose the market demand data for the product are as follows:


Price		Total quantity demanded


$26 32 38 41 46 56 66		17,000 15,000 13,500 12,000 10,500 9,500 8,000

What will be the equilibrium price? What will be the equilibrium output for the industry? For each firm? What will profit or loss be per unit? Per firm? Will this industry expand or contract in the long run?

Price: $2.99

Answer: The solution consists of 5 pages
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