Q4 The following problem traces the relationship between fir

Q.4. The following problem traces the relationship between firm decisions, market supply, and market equilibrium in a perfectly competitive market. a) Complete the following table for a single firm in the short run. OutputTFC TVC TC AVC ATC MC 230 400 540 720 b) Using the information in the table, fill in the following supply schedule for this individual firm under perfect competition and indicate profit (positive or negative) t each output level. (Hint: at each hypothetical price, what is the MR of producing 1 more unit of output? Combine this with the MC of another unit to figure out the quantity supplied.) Price Quantity supplied Profit

Solution

A) The table is completed below. Fixed cost remains unchanged at 300. TC = TVC + TFC. Then we use AVC = TVC/Q, ATC = TC/Q and MC = (TCn - TCn-1)/Qn - Qn-1

b) Supply schedule is marginal cost schedule starting from minimum AVC value. This is $70 so when price is below $70, firm has shut down its operations and there is no production. At P = 70, firm is indifferent between producing or not. If it produces, it will see that its MC is close to P when it produces 3 units. At this level, ATC is 170. Hence profit is (P - ATC)*Q = (70 - 170)*3 = -300. Use the same method to find profits for all levels

c) Multiply the individual quantity supplied by 100

d) Equilibrium price is $170 when quantity demanded and supplied are equal to 600 units. . Each firm produces 6 units and earns $180 as profit.

e) As profits are occuring, firms will enter the market in the long run. This will drive the price down to the minimum of ATC which is $140 (and constant). Hence long run price is $140. At this price, MC is also 140. In the long run quantity demanded will increase as number of firms are increased.

output	TFC	TVC	TC	AVC	ATC	MC
0	300	0	300
1	300	100	400	100.00	400.00	100
2	300	150	450	75.00	225.00	50
3	300	210	510	70.00	170.00	60
4	300	290	590	72.50	147.50	80
5	300	400	700	80.00	140.00	110
6	300	540	840	90.00	140.00	140
7	300	720	1020	102.86	145.71	180
8	300	950	1250	118.75	156.25	230
9	300	1240	1540	137.78	171.11	290
10	300	1600	1900	160.00	190.00	360