Homework SourseA5 In a perfectly competitive industry the market price is 2
A5. In a perfectly competitive industry, the market price is $25. A firm is currently producing 10,000
units of output, its average total cost is $28, its marginal cost is $20, and its average variable cost is $20. Given these facts, explain whether the following statements are true or false:
a. The firm is currently producing at the minimum average variable cost.
b. The firm should produce more output to maximize its profit.
c. Average total cost will be less than $28 at the level of output that maximizes the firm’s
profit.
Hint: You should assume normal U-shaped cost curves for this problem.
Solution
Relationship between Average cost and Marginal Cost
Output (Unit)
Total Cost($)
Average Cost($)
Marginal Cost($)
1
2
3
4
5
6
7
8
9
10
36
56
72
86
98
108
122
138
156
176
36
28
24
21.5
19.6
18
17.4
17.3
17.3
17.6
36
20
16
14
12
10
14
16
18
20
a) No the firm is producing more then avearge variable cost because the market price is $ 25 per unit but the average veriable cost is $ 20.
b) Yes firm should produce more output to maximize its profit because according this table average cost and marginal cost both are decreasing due to increasing output.
c) when firm will produce 8 unit of the output the average cost will be $17.3 & marginal cost will be $16 but the market price is $25 so we can say that AR> AC( $25>$ 17.3) So we can say that this level of production will be maximizes firm\'s profit.
| Output (Unit) | Total Cost($) | Average Cost($) | Marginal Cost($) |
| 1 2 3 4 5 6 7 8 9 10 | 36 56 72 86 98 108 122 138 156 176 | 36 28 24 21.5 19.6 18 17.4 17.3 17.3 17.6 | 36 20 16 14 12 10 14 16 18 20 |
