er 1213 Assum e that the most efficient production technology available for maki

Question

er 1213 Assum e 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 In part a round answer 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? ATC Output 25,000 50,000 75,000150,000 100,000 275,000 MD $0.50 1.00 2.50 3.00 TC $100,000 187,500 b. is this a decreasing-cost industry?Ye yes or no 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? c. firm(s) Suppose that, instead, the market quantitu demanded at a price of $2.50 is only 75,000. many firms do you expect there to be in this industry?firm) Review your answers to parts b, c,d. Does the level of demand determine this industry's market structure?Yyes or no d. How e.

Explanation / Answer

a)

b. No, the ATC (average total cost) does not decline at all levels of output, as ATC rises from 2.50 to 2.76 when output increase from 75,000 to 100,000. So it s not a decreasing cost industry.

c). Since $2.50 is the minimum ATC, firms will produce at this level of output. Any firm that deviated from this level would incur a higher ATC (i.e, if firm produce different output than 75,000) so it would be unprofitable at the market price of $2.50. It is so because except the output level of 75,000 at all level of output the ATC is higher than $2.50 and at market price $2.50 any higher ATC will lead to loss of the firm so each firm will only produce 75,000 at market price $2.50.

The total number of firms = Market Demand / Output of each firm

so at price $2.50, the output of each firm is 75,000 and market demand is 75,000,000 bottles.

Number of firms = 75,000,000 / 75,000 = 1,000 firms.

d) now market demand is 75,000 so

number of firms = 75,000 / 75,000 = 1 firm.

e) Yes, high demand will result in a competitive industry while very low demand can result in a monopoly industry as only one industry when demand is 75,000 bottles only.

Output TC MC ATC 25,000 $100,000 $0.50 100,000 / 25,000 = $4.00 50,000 150,000 1.00 3.00 75,000 187,500 2.50 2.50 100,000 275,000 3.00 2.76

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