Application of Perfect Competition decision making process to max profits You ha

Question

Application of Perfect Competition decision making process to max profits

You have been hired as a consultant to make recommendations to the 4 firms listed below. Each of the competitors wants to maximize profits. Each row represents a separate firm. Apply the rules of marginal analysis to help you advise each of the firms separately. For example should they increase or decrease output, do nothing, or shut down. Explain your rationale for each firm (why you made the recommendations you listed)

Perfect Competition firms:

Price      Q             TR           TC           P/L         TVC        ATC        AVC       MC

4             100         400         350         +50         300        3.5           3             5

10            20          200         500         -300      300         25           15           10          

50          100         5000       5100       -100       3000        51           30           90          

25           100         2500       2500       0              2000      25           20           25

Explanation / Answer

1. Firm should not do anything as it is earning profits and there is no scope to increase it further as Marginal Cost is higher than the AverageTotal Cost.

2. Firm should increase the level of output so as to increase the profits as the marginal cost is lower than the ATC.

3. Firm should shut down the production as the Marginal cost is much higher than the ATC and the firm is incurring losses.

4. Firm should reduce the level of output as the marginal cost is equal to the ATC.

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