Question

The table below shows output, fixed, variable, and total costs for a firm in a perfectly...

The table below shows output, fixed, variable, and total costs for a firm in a perfectly competitive market.

Output

Fixed Cost (FC)

Variable Cost (VC)

Total Cost (TC)

Avg. Fixed Cost (AFC)

Avg. Variable Cost (AVC)

Avg. Total Cost (ATC)

Marginal Cost (MC)

0

5

0

1

7

2

10

3

9

4

19

5

25

1. Fill in the blank spaces in the fixed, variable, and total cost columns. Also complete the AFC, AVC, ATC, and MC columns (round all answers to 2 decimal places).

2. If the market price of the good the firm is selling is $6, then what is the profit-maximizing level of output and why? Calculate the profit at the profit-maximizing level of output (show your work). Should the firm operate in the short run? Why?

3. If the market price of the good the firm is selling is $4, then what is the profit-maximizing level of output and why? Calculate the profit at the profit-maximizing level of output (show your work). Should the firm operate in the short run? Why?

4. If the market price of the good the firm is selling is $2, then what is the profit-maximizing level of output and why? Calculate the profit at the profit-maximizing level of output (show your work). Should the firm operate in the short run? Why?

5. Assuming free entry and exit of other firms, what is the long-run equilibrium price in this market? Briefly explain your answer.

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