Homework SourseChapter 8 Exercise 1 The graph on Figure 1 summarizes the de
Chapter 8. Exercise 1. The graph on Figure 1 summarizes the demand and costs for a firm that operates in a perfectly competitive market.
a. What level of output should this rm produce in the short run?
b. What price should this rm charge in the short run?
c. What is the rm\'s total cost at this level of output?
d. What is the rm\'s total variable cost at this level of output?
e. What is the rm\'s xed cost at this level of output?
f. What is the rm\'s pro t if it produces this level of output?
g. What is the rm\'s pro t if it shuts down?
h. In the long run, should this rm continue to operate or shut down?
Solution
a. The firm should produce at the profit maximisation level in the short run ,i.e., MR=MC
At this level output = 7
b. The firm should charge to maximise its profit in the short run at the profit maximisation output level,i.e., MR=MC
At this, Price = $28
c. The firms total cost at this level of output (7 units),
Total Cost = $32 per unit
d. Total Varible Cost ( 7 units),
Variable Cost = $14 per unit
e.Total Cost = Total Fixed Cost + Total Variable Cost
Therefore, Total Fixed Cost = 32-14 = $18 per unit
f. The firm does not experiences profit, as ATC is greater than the Price of the goods sold.
Loss = 28-32= -$4 per unit
g. If the firm continues to run, loss = (P-ATC)*Q
= 28-32 = -$4 per unit.
Total Loss = 4*7 = -$28
If the firm decides to shut down, loss = -AFC*Q
= -18*7 = -$136
Therefore, the firm should continue to sell the goods in the short run.
h. In the long run, market equilibrium will be established as firms would exit market due to loss in the short run and the supply curve would come down. This would lead to a balance in the demand and supply curve, making the market stable for running the business.
Due to entry and exit, the long-run equilibrium market price is at the level equal to the minimum point of firm’s ATC curve. See graph below. All the firms in a perfectly competitive market earn economic profit equal to zero.
Shutdown point and break-even point are the same in the long run: the minimum point of ATC curve.
