Assume that the most efficient production technology available for making vitami

Question

Assume that the most efficient production technology available for making vitamin pills has the cost structure given in the following table. Note that output is measured as the number of bottles of vitamins produced per day and that costs include a normal profit.

Instructions: In part a, round your answers to 2 decimal places. In parts c and d, enter your answers as whole numbers.

a. What is ATC per unit for each level of output listed in the table?

b. Is this a decreasing-cost industry? No.

c. Suppose that the market price for a bottle of vitamins is $2.50 and that at that price the total market quantity demanded is 75,000,000 bottles. How many firms will there be in this industry? ______ firm(s).

d. Suppose that, instead, the market quantity demanded at a price of $2.50 is only 75,000. How many firms do you expect there to be in this industry? _______ firm(s).

e. Review your answers to parts b, c, and d. Does the level of demand determine this industry’s market structure? Yes

Output TC MC ATC 25,000 $100,000 $3.00 ? 50,000 150,000 2.00 ? 75,000 187,500 1.50 ? 100,000 275,500 3.52 ?

Explanation / Answer

a)

b) No the industry is not decreasing cost as the ATC increases with increase in output from 75K to 100k.

c)  Suppose that the market price for a bottle of vitamins is $2.50 and that at that price the total market quantity demanded is 75,000,000 bottles then there will be 75000000/75000 firms i.e 1000 firms

d) the market quantity demanded at a price of $2.50 is only 75,000. then the number of firms will be 75000/75000

i.e 1 firm to supply the whole market.

e) We can see from parts b,c and d the quantity demanded determines the number of firms in the industry

Output TC MC ATC(TC/Output) 25,000 $100,000 $3.00 4 50,000 150,000 2.00 3 75,000 187,500 1.50 2.5 100,000 275,500 3.52 2.755

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