A purely competitive firm finds that the market price for its product is $20.00.

Question

A purely competitive firm finds that the market price for its product is $20.00. It has a fixed cost of $100.00 and a variable cost of $10.00 per unit for the first 50 units and then $25.00 per uni for all successive units. Does price equal or exceed average variable cost for the first 50 units? What is the average variable cost for the first 50 units? Does price equal or exceed average variable cost for the first 100 units? What is the average variable cost for the first 100 units? What is the marginal cost per unit for the first 50 units? What is the marginal cost for units 51 and higher? For each of the first 50 units, does MR exceed MC? What about for units 51 and higher? What output level will yield the largest possible profit for this purely competitive firm? Learning Objective: 10-05 Explain how purely competitive firms can use the marginal-revenue-marginal-cost approach to maximize profits or minimize losses in the short run.

Explanation / Answer

1) The price exceeds the variable cost becasue price of 50 units =50*20=1000

The fixed cost is 100

The variable cost is 10*50=500

2) The price is less than the variable cost. The variable cost for 100 units = 1750

For first 50 units variable cost = 50*10=500 and for the next 50 units the variable cost = 50*25=1250. Thus, total variable cost is 1750

3) The marginal cost for first 50 units is Rs.0. For unit 51 the marginal cost become 125-110=15.

4) Yes, MR exceeds marginal cost.

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