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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