• A firm in a purely competitive industry is currently producing 1000 units per

Question

•         A firm in a purely competitive industry is currently producing 1000 units per day at a total cost of $450. If the firm produced 800 units per day, its total cost would be $300, and if it produced 500 units per day, its total cost would be $275.

•         What is the firm’s ATC per unit at these three levels of production?

•         If every firm in this industry has the same cost structure, is the industry in long-run competitive equilibrium?

•         From what you know about these firms’ cost structures, what is the highest possible price per unit that could exist as the market price in long-run equilibrium? If that price was the market price and the normal rate of profit is 10%, how big will each firm’s accounting profit be (per unit)?

Explanation / Answer

1000 units per day at cost of $450 = 2.2 per unit

800 units will cost $300.= 2.6 per unit

500 units will cost $275= 1.8

2.2, 2.6 and 1.8 respectively

Here the industry is perfectly competitive, So the firm must restrict the production to 500 units per day to achieve maximum advantage.

1.8 is the most effective price we have found so far, So the cost will be 1.8 in longer term.

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