chapter 9

3616 WordsNov 29, 201415 Pages
Chapter 6 Perfectly Competitive Markets 1. A firm sells a product in a perfectly competitive market, at a price of $50. The firm has a fixed cost of $30. Fill in the following table and indicate the level of output that maximizes profit. How would the profit-maximizing choice of output change if the fixed cost increased from $40 to $60? More generally, explain how the level of fixed cost affects the choice of output. The table is as follows: Output (Units) Total Revenue ($/unit) Total Cost ($/unit) Profit ($) Marginal Revenue ($/unit) Marginal Cost ($/unit) 0 0 30 -30 50 1 50 80 -30 50 50 2 100 100 0 50 20 3 150 130 20 50 30 4 200 172 28 50 42 5 250 226 24 50 54 6 300 296 4 50 70 When the firm is producing a positive amount of…show more content…
The minimum level of ANSC is thus 10. For prices below 10 the firm will not produce and for prices above 10, its supply curve is found by setting P = SMC: The firm’s short-run supply curve is thus e) If all fixed costs are non-sunk, as in this case, then ANSC = ATC = (40/Q) + 10 + 0.1Q. The minimum point of ANSC occurs where ANSC = SMC: The minimum level of ANSC is thus 14. For prices below 14 the firm will not produce and for prices above 14, its supply curve is found by setting P = SMC as before. 5. The oil drilling industry consists of 60 producers, all of whom have an identical short-run total cost curve, STC(Q) = 64 + 2Q2, where Q is the monthly output of a firm and $64 is the monthly fixed cost. The corresponding short-run marginal cost curve is SMC(Q) = 4Q. Assume that $32 of the firm’s monthly $64 fixed cost can be avoided if the firm produces zero output in a month. The market demand curve for oil drilling services is D(P) = 400 − 5P, where D(P) is monthly demand at price P. Find the market supply curve in this market, and determine the short-run equilibrium price. The firm’s ANSC curve is given by 32/Q + 2Q. To find the shut-down price, we find the minimum level of ANSC. This occurs at the quantity at which ANSC equals MC, or 32/Q + 2Q = 4Q. Solving for Q yields Q = 4, and substituting this into the expression for ANSC tells us that the minimum level of ANSC is

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