Question

Quantity	Marginal Cost	ATC
0	—	——
1	$3	$8.00
2	2	5
3	3	4.33
4	4	4.25
5	5	4.40
6	6	4.67
7	8	5.15
8	9	5.62
9	10	6.11
10	12	6.70

Use the table above to answer the following questions. Assume the table above describes the costs for a typical firm in a perfect competition industry and the market equilibrium price is $9.

A) How many units should this firm produce ?

B) What are the firm’s profits ? You must explain how you determined your answer.

C)What is the long run equilibrium price ?

D) If 2024 units are being sold in the market in the long run, how many identical firms are there in the marketing the long run..

Answer 1

A.

8 unit.

Explanation :

Firm produce where MR equals MC to maximise its profit. In perfect competition price is equals to MR. So at price 9, MR equals MC. So it will produce 8 units.

B.

Profit : 27.04

Explanation :

Profit =(Price - ATC) *quantity

=(9-5.62)*8

=3.38*8

=27.04

At price 9, 8 unit sold. And ATC will be 5.62.

C.

4.25

Explanation :

In long run perfectly competitive firm earns zero economic profit. So it price =minimum ATC. Here minimum ATC is 4.25. So long run price will be 4.25.

D.

506 firms

Explanation :

In long run perfectly competitive firm produce 4 quantity because at atc 4.25 quantity will be 4 units.

Number of firms =market quantity /firm quantity

=2024/4

=506.