3. A perfectly competitive firm has the demand and total cost schedules given in
ID: 1189803 • Letter: 3
Question
3. A perfectly competitive firm has the demand and total cost schedules given in the following table. If it wants to maximize profits(MR=MC or TR=TC), how much output should it produce?(2 points)
Quantity Price Total Cost
1 $6 $1.00
2 5 2.50
3 4 6.00
4 3 7.00
5 2 11.00
Calculation Procedure:
4.If the firm’s lowest average cost is $52 and the corresponding average variable cost is $26, what does it pay a perfectly competitive firm to do if
1)The market price is $51?(1 point)
Calculation Procedure:
2)The price is $36?(1 point)
Calculation Procedure:
3)The price is $12?(1 point)
Calculation Procedure:
Explanation / Answer
(3)
Working Note:
1. TR = Q x P
2. MR = P (In perfect competition)
3. Profit = TR - TC
The following calculation table shows TR, TC & Profits.
Q
P($)
TR ($)
TC ($)
Profit ($)
1
6
6
1
5
2
5
10
2.5
7.5
3
4
12
6
6
4
3
12
7
5
5
2
10
11
-1
As is seen, profit is maximized (= $7.5) when Q = 2.
So firm should produce 2 units of output.
(4)
1. If P = $51, then Price is lower than ATC but higher than AVC [26 < 51 < 52]
So, in the short run the firm will operate because it can cover its variable costs.
2. If P = $36, then Price is lower than ATC but higher than AVC. [26 <36 < 52]
So, in the short run the firm will operate because it can cover its variable costs.
3. If P = $12, price is lower than even AVC, so it cannot recover its variable costs and should shut down.
Q
P($)
TR ($)
TC ($)
Profit ($)
1
6
6
1
5
2
5
10
2.5
7.5
3
4
12
6
6
4
3
12
7
5
5
2
10
11
-1
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