Question
In the case above, the market is competitive so marginal
revenue equals the price of $67.00. From the table above, we can
find where marginal revenue is equal to marginal cost, or ifthey
don’t equal each other, find the last unit where marginal revenue
is greater than marginal cost. The firm will want to produce 9
units. We also need to verify that price exceeds average variable
cost at this level of production. The answer is yes, average
variable cost is less than the price, $67.00.
At this level of production, the firm will earn a positive
economic profit per unit of $17.00 (= (price of product) – (average
total cost for the last unit produced)). The total economic profit
equals $153.00 (=(number of units sold) × $(profit per unit)).
b. The same process is applied here. The price of $42.00 is
marginal revenue, and we compare this to marginal cost in the same
manner as in part (a). The firm will produce 6 units of
output if the average variable cost for 6 units is less than the
price, $42.00. After comparing those, we see the firm will
produce the 6 units of output. At this level of production, the
firm will earn a negative economic profit per unit or loss per unit
of $-5.50 (= (price of product) – (average total cost for the 6
unit). The total economic profit (loss) equals $12.00 (= (number of
units sold) × (loss per unit)).
c. We could go through the same exercise here; however, by
recognizing that the price of $33.00 is below average variable cost
at all levels of production, the firm will not produce. Thus, the
firm shuts down and incurs a loss of $60.00 (fixed cost).
d, e.(1)(2)(3)(4)PriceQuantity Supplied,Single FirmProfit (+)
or Loss (–)Quantity Supplied,
1,500Firms$23.000$-60028.000-60033.000-60039.005-507,50044.006-219,00048.007610,50058.0087912,000
f. To determine the equilibrium price, we look at the total
quantity demanded schedule and the total quantity supplied schedule
(for the 1,500 firms above) to find the price where quantity
demanded equals quantity supplied. This occurs at a price of $48,
where quantity demanded
= 10,500 and quantity supplied = 10,500. The quantity 10,500
is the equilibrium output for the industry. Note that at prices
below $48 quantity demanded exceeds quantity supplied and at prices
above $48 quantity supplied exceeds quantity demanded.
The equilibrium output for each firm is 7 units (= 10,500
(industry output)/1,500 (number of firms)). If the
equilibrium price of $48 is below the average total cost for 7
units of output at the firm level, there will be a loss; otherwise,
there will be a gain.
The per-unit Profit for the firm is $0.86 (= (price) –
(average total cost for 7 units)).
The Profit per firm is 6.02 (= 7 units produced) × ($0.86)
(loss per unit)).
This industry will contract if there is negative economic
profit (or economic loss). It will expandif there is positive
economic profit. In this case, the industry will Expand.
7. The table below shows the total cost (TC) and marginal
cost (MC) for Choco Lovers, a perfectly competitive firm producing
different quantities of chocolate gift boxes.The market price of a
gift box is $8 per box.
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