Question

Consider the following table.   

Quantity	Total Cost
0	$                    46
2	$                   47
4	$                  48
6	$                  49
8	$                  51
10	$                  57
12	$                  65
14	$                  75
16	$                 87

1. Suppose that the price of the product is $3. How many units will the firm produce in the short run?

2. In the long run, will the price rise or fall from the current level at $3?    Explain the reason.          

Answer 1

Answer)

In the short run, the firm will produce at the point where ,

Marginal revenue = Average revenue = Marginal cost

So, we can see in the above diagram that the firm would produce 10 units of good.

Answer 2.)

In the long run, the price level would decrease as more firms would enter the market anticipating the increased profit.

More firms would ultimately lead to more supply of goods whch would mean decreased price of goods.

So, the price would fall from $3.