The following table gives data of production costs of a firm. Fill the missing e

Question

The following table gives data of production costs of a firm. Fill the missing entries of the given table and show your calculations in the given area below in order to get full credit. Assume that this firm aims to maximize its profit and it operates in a perfect competitive market, which has a short-run equilibrium given by Pmarket=40 and Qmarket=120. Using the all the relevant information also given in part a), determine how much of the market output is supplied by this firm? In addition to part a) and b); assume that all of the firms in this market have the same cost figures and determine the number of firms operating in this market. Calculate the profit level of the firm. Is this market in the long run equilibrium? If YES: explain why it is in the long run equilibrium? If NO. describe the process in this market to reach the long run equilibrium? (No calculations are necessary. You can use graphs.) Go back to part a) and now assume that the given firm operates as a monopoly. Suppose that the demand curve for the market is given by: Calculate the marginal revenue equation for this firm? Determine the profit maximizing price and quantity for this firm? I Calculate the profit level of the firm.

Explanation / Answer

(1)

Working notes:

(a) TC = TFC + TVC

(b) TFC = TC at Q = 0, so TFC = 25

(c) ATC = TC / Q

(d) AFC = TFC / Q

(e) AVC = TVC / Q

(f) MC = Change in TC / Change in Q

Accordingly, computations as follow.

(a)

(b)

A perfectly competitive firm will equate market price with its MC.

So, P = 40 - MC where Q = 3

So, share of market output supplied by this firm = 3 / 120 = 0.025, Or 2.5%

(c)

Total number of firms = Industry output / individual firm output [Since all firms have similar cost structure, their outputs are same]

= 120 / 3

= 40

(d)

Profit = Firm's quantity x (P - ATC)

= 3 x (40 - 38.3) = 3 x 1.7 = 5.1

(e)

The market is not in long run equilibrium. A perfectly competitive firm is in LR equilibrium when P = ATC = MC. But here ATC and MC are different, so excess profit is possible.

Such short run excess profits earned by existing firms will attract entry into themarket (since entree is free), and higher number of firms will lower the existing firms' outputs, whose excess profit will start decreasing. Eventually, all excess profits will be eroded and the firms will earn only normal profits, operating at the lowest point of their long run ATC curve.

NOTE: Out of 6 sub-parts, the first 5 are answered.

Q TC TFC TVC ATC AFC AVC MC 0 25 25 0 0 0 0 0 1 40 25 15 40 25 15 15 2 75 25 50 37.5 12.5 25 35 3 115 25 90 38.3 8.3 30 40 4 165 25 140 41.3 6.3 35 50 5 250 25 225 50 5.0 45 85

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