The information in the exhibit below describes a perfectly competitive firm Exhi
ID: 1161973 • Letter: T
Question
The information in the exhibit below describes a perfectly competitive firm Exhibit 8-5 TFC $10.00 10.00 10.00 10.00 10.00 10.00 10.00 10.00 TVC S 0.00 20.00 38.00 54.00 72.00 92.00 114.00 138.00 TC MC 0 S 10.00 30.00 48.00 64.00 82.00 102.00 124.00 148.00 $20.00 18.00 16.00 18.00 20.00 22.00 24.00 4 If the market price is $21, this perfectly competitive firm will earn how much profit? If the market price is $15, the minimum loss this perfectly competitive firm can incur is? Assume the firm is perfectly competitive and the market price is $21. What action will the firm take to maximize profit or minimize loss? Assume the firm is perfectly competitive and the market price is $15. What action will the firm take to maximize profit or minimize loss?Explanation / Answer
In perfectly competitive market the price is set equal to marginal cost.
P = MC
A. P = $21
Here, at no quantity MC is equal to $21. The firm will choose to manufacture up to that quantity where MC = $20
At Q = 1 and Q = 5
When Q = 1 , firm makes a loss hence firm will not produce Q = 1.
When Q = 5,
TC = $102
TR = PQ = 21 ×5 = $105
Profit,? = TR - TC
? = $3
B. When P = $15
The firm will never continue it's production
Minimum Loss = FC = - $10
C. At a price of $ 21 the firm is making a profit. In order to maximize it's profit the firm has to reduce it's marginal cost of production. This the firm will be able to achieve through economies of scale in the long run.
The firm cannot change the market price since perfectly competitive market and no firm has market power to influence the prices.
Hence, the firm should focus on specialization this will curtail down the cost.
D. Here in the given case the Minimum Average Variable cost is $ 18 per unit which is greater than the Price of the output. Hence, the firm must Cease production immediately in order to minimize it's losses. That is firm must exit the industry.
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