A purely competitive firm finds that the market price for it

A purely competitive firm finds that the market price for its product is $25.00. It has a fixed cost of $100.00 and a variable cost of $10.00 per unit for the first 50 units and then $30.00 per unit for all successive units

Does price exceed average variable cost for the first 50 units? (Click to select)NoYes

Instructions: Round your answer below to two decimal places.

What is the average variable cost for the first 50 units?

Instructions: Round your answers to two decimal places.

What is the average variable cost for the first 100 units?

What is the marginal cost per unit for the first 50 units? $ per unit for the first 50 units.

What is the marginal cost for units 51 and higher? $ per unit for subsequent units.

For each of the first 50 units, does MR exceed MC? (Click to select)YesNo

For the units 51 and higher does MR exceed MC? (Click to select)YesNo

What output level will yield the largest possible profit for this purely competitive firm?

Producing units will maximize profit.

Solution

(a) Yes.

Average variable cost (AVC) for first 50 units is $10, while price is $25. So price exceeds AVC.

(b) AVC for first 50 units is $10.00.

(c) Variable cost for first 50 units = $10 x 50 = $500

Variable cost for bext 50 units = $30 x 50 = $1500

Total variable cost, TVC = $(500 + 1500) = $2000

AVC = TVC / 100 = $2000 / 100 = $20.00

(d)

TC for 0 units = FC = $100

Total cost (TC) for first 50 units = VC + FC = $10 x 50 + $100 = $(500 + 100) = $600

Marginal cost (MC) for first 50 units = Change in TC / Change in units = $(600 - 100) / (50 - 0) = $500 / 50 = $10

So, MC = AVC

(e) For 51 units & more, MC = $30

(f) Yes.

Total revenue, TR for first 50 units = P x Q = $25 x 50 = $1250

TR when Q = 0 is 0.

MR = Change in TR / Change in Q = $(1250 - 0) / (50 - 0) = $1250 / 50 = $25 > $10

So MR > MC. [P = MR]

(g) No.

Price when Q is above 51 = $25

MC when Q = 51 or higher = $30

So, MR < MC

Note: First 7 sub-parts are answered.