7. (10 points) Assume the following cost data are for a perfectly competitive fi

Question

7. (10 points) Assume the following cost data are for a perfectly competitive firm. Average Average Average Total Fixed Variable Total Fxed Variable Total ProductCoCost Cost Marginal Cost Cost Cost Cost 0 S100 SO S100 1S100 S44 $144 $100.00 $43.74$143.74 $43.74 2 S100 S84 S184 $50.00 $41.92 $91.92 $40.10 3 S100 $120 S220 $33.33$40.10 $73.43 $36.45 4S100 $153 S253 $25.00 $38.27 $63.27 $32.81 5 S100 $190 S290 $20.00 $37.9$57.91 $36.45 6 S100 $230 S330 $16.67 $38.27 $54.94 $40.10 7 S100 $273 S373 $14.29 $39.05 S53.34 $43.74 8 S100 $324 S424 $12.50 $40.55S53.05 $51.03 9S100 $383 S483 $$42.53 S53.64 $58.32 10S100 S448 S548 $10.00 $44.83 S54.83 $65.61 a. At a product price of $35, will this firm produce in the short run? If it is preferable to produce, what will be the profit-maximizing or loss-minimizing output? What economic profit or loss will the firm realize? b. Answer the same questions assuming product price is $45 c. Answer the same questions assuming product price is $55

Explanation / Answer

(a) No, because $35 is always less than AVC.

If it did produce, its output would be 4, found by expanding output until MR no longer exceeds MC. By producing 4 units, it would lose $113 [= 4 ($35 - $63.27)].

By not producing, it would lose only its total fixed cost of $100.

(b) Yes, $45 exceeds AVC at the loss-minimizing output.

Using the MR = MC rule it will produce 7 units. Loss per unit or output is $58.38 (= 7($45 - $53.34).

which is less than its total fixed cost of $100.

(c) Yes, $55 exceeds AVC (and ATC) at the loss-minimizing output. Using the MR = MC rule it will produce 8 units. Profits per unit = $15.6 (= 8*($55 - $53.05); total profit = $15.6

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