Question

a) Assume a perfectly competitive firm’s total cost (TC) for different levels of output Q is given by:

Q- a) Assume a perfectly competitive firm’s total cost (TC) for different levels of output Q is given by:

Q   TC
0     50
1    100
2    140
3    170
4    190
5   210
6    230
7    260
8    300
9    350
10 410

At a price of $35 how many units will be produced in the short run? At this price how many units will be produced in the long run?

TC- 50,100

Answer 1

Marginal cost (MC) = Change in TC / Change in Q

Q	TC	MC	TR = $35 x Q	Profit = TR - TC
0	50		0	-50
1	100	50	35	-65
2	140	40	70	-70
3	170	30	105	-65
4	190	20	140	-50
5	210	20	175	-35
6	230	20	210	-20
7	260	30	245	-15
8	300	40	280	-20
9	350	50	315	-35
10	410	60	350	-60

A perfectly competitive firm maximizes proft by equating Price with MC. From above table,

When Q = 7, Price = $35 and MC = $30, and when Q = 8, Price = $35 and MC = $40. Since the firm will produce when Price > MC, the corresponding short-run output is 7 units with P = $35 and MC = $30.

When Price = $35, firm is making negative profit (Loss) at every output level, so nothing will be produced in long run since firm will exit the market.