A firm in a purely competitive industry is currently producing 2000 units per da

Question

A firm in a purely competitive industry is currently producing 2000 units per day at a total cost of $900. If the firm produced 1600 units per day, its total cost would be $600, and if it produced 1000 units per day, its total cost would be $550. • 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 the 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 longrun equilibrium? If this price was the market price and if the normal rate of profit is 10%, what will each firm’s accounting profit be (per unit)?

Explanation / Answer

ATC at each level

at 2000 units atc is 2.2 per unit

at 1600 units atc is 2.6

at 1000 units atc is 1.8 per unit

The lowest cost is acheieved at 1000 and cost structure is similar and they are all likely to stay in market so yes, They are in long run equilibrium

Most firms would try to achieve volume so we can take 2000 as volume and with 10 % added profit at $2.2+ 10% = $2.42

per unit profit is $0.22 per unit

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