A firm in a purely competitive industry is currently producing 1,000 units per d

Question

A firm in a purely competitive industry is currently producing 1,000 units per day at a total cost of $500. If the firm produced 800 units per day, its total cost would be $350, and if it produced 500 units per day, its total cost would be $325.

Instructions: In parts a and c, round your answers to 2 decimal places. In part d, round your answer to 1 decimal place.

a. What are the firm's ATC at these three levels of production?      

     At 1,000 units per day, ATC = $.      

     At 800 units per day, ATC = $.      

     At 500 units per day, ATC = $.

b. If every firm in this industry has the same cost structure, is the industry in long-run competitive equilibrium?  (Click to select)NoYes.

c. 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? $.

d. If that price ends up being the market price and if the normal rate of profit is 10 percent, then how big will each firm’s accounting profit per unit be?  cents per unit.

Explanation / Answer

Given that the firm is producing  1,000 units per day at a total cost of $500.

If the firm produced 800 units per day, its total cost would be $350, and if it produced 500 units per day, its total cost would be $325.

a. At 1,000 units per day, ATC = 500/1000=$0.50

b. At 800 units per day, 350/800=$0.4375

c. At 500 units per day, ATC = 325/500=$0.65

b. No, the industry is not in long-run competitive equilibrium. This firm is not at long run competitive equilibrium because it is not producing at the minimum level of ATC. They are producing at a level higher that minimum point of ATC.

c. The highest possible price per unit that could exist as the market price in long-run equilibrium is $0.4375 because this is the minimum of the three average total costs.

d. From the part c, we know that the price is 0.4375 and the profit rate is 10%,so each firm’s accounting profit per unit be $4.4 cents

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