Question

1. Suppose a competitive firm previously set its price at $15 per unit to maximize its profit, which had been positive. Then the market price falls to $12 and the firm adjusts in order to maximize its profits at the decreased price. After these adjustments what can we conclude about the firm’s quantity of output, average total cost, and marginal revenue in terms of being higher, lower, or the same as before?

2. At current output a profit maximizing competitive firm gets $8 per unit produced and has average total costs of $12. When the market price is $8, the firm's marginal cost curve crosses its marginal revenue curve where Q=120 units. a. Draw two graphs side-by-side: On the left side, sketch a representation of the market equilibrium (i.e. supply, demand, market equilibrium quantity and market equilibrium price). On the right side, sketch a representation of the individual competitive firm's cost curves (I haven't provided much information about the actual shape, but draw something consistent with the given data). Make sure the market equilibrium price determined in your leftmost graph appears in your rightmost graph: Each individual firm takes the market price as given! b. What is the firm's current level of profit? Do you anticipate entry or exit into the market? Explain your reasoning.

Please answer question #1.

Answer 1

As it is given in the question that the market price has fallen from $15 to $12 and the firm accepts this price.

As per the law of demand and the law of supply with the decline in the prices the demand for the product will increase and the supply for the product will increase because of the decrease in the prices of the product.

As a result the quantity of output will decrease and the Average total cost will rise because of the lesser no. of units produced.

When the less commodities will be produced the marginal revenue will decrease with the lesser output.

So the quantity of output will fall, average total costs will rise and the marginal revenue will decrease.