Chapter 7, Problem 13P

To determine

Concept Introduction

Perfect Competition: This is a situation that prevails in the market where there are numerous buyers and sellers. When a market is in perfect competition, the price of a product cannot be influenced by a single buyer or seller.

Variable Cost: This refers to the cost which is not fixed and varies as the quantity of a good or service produced changes.

Average Variable Cost: This refers to the variable cost per unit at a particular level of production. It shall be calculated as follows:

Total Cost: This refers to the entire cost incurred in the production of goods or services, whether fixed or variable. It shall be calculated as follows:

Average Total Cost: This refers to the total cost per unit which includes both fixed and variable cost at a particular level of production. It shall be calculated as follows:

Marginal Cost: This refers to the change in cost which is incurred when an additional unit of any good or service is produced. It shall be calculated as follows:

Break-even Price: This is the level of price when the economic profit is zero. The price is said to break-even when it is in equilibrium in the long-run. This happens when the price is equal to the lowest average total cost.

Shut-down Price: This is the level of price when the revenue is equal to the variable cost. This happens when the price is equal to the lowest average variable cost. When the price falls below this level, the production of goods shall shut-down.