Answer the questions that follow the table. PRICE-S1.00. PROFIT/ OUTPUT TR MR TC

Question

Answer the questions that follow the table. PRICE-S1.00. PROFIT/ OUTPUT TR MR TC MC ATC AVC 0 $0.00 $1.00 $1.00 $3.001 $1.00-Ts3.50 Ls070. $0.83-$0.50 $1.17 00 $1.00 $$20 S0.70 S0.87 $0.70 $0.80 7 1.00 | $0.71-t-$1.00 s6.00 $0.80-50.86 s8.00 | $1.00 $686 ! $0.86 t so.86 50.73- $1.14 9.00 S1.00 S7.86 S1.00 $O.87 $0.76 $1.14 $10.00$1.00 $9.36 $1.50 $0.94 $0.84 $0.64 s11.001 $1.00 | $12.00 i s2.001 s109 I sl.00 Ls1.00 1.14 10 Where will this firm produce? Is this firm in long-run equilibrium? How can you tell? What would cause a shut-down decision in the short run? Based on what you can see in the table, what type of market structure do you believe this fr might be? How can you tell? If this situation continues, what do you expect to happen in this market?

Explanation / Answer

Price is $1 and if we look at the MC schedule, it is 1 when 9 units are produced (reject MC = 1 for Q = 1). Hence firm produces 9 units

Short run because MC is 1, Price is 1 and ATC is 0.87

If the price falls below the minimum of AVC which is 0.70, then the firm will have to shut down its operations

Since there is no downward sloping demand for this firm and price is fixed at $1, this is perfectly competitive market

Firm is earning a profit so we expect more firms to enter in future and this would reduce the price to minimum AVC which is 0.87. Then there will be no economic profit in the long run.

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