Question

A firm in a purely competitive industry is currently producing 1,200 units per day at a total cost of $600. If the firm produced 1,000 units per day, its total cost would be $350, and if it produced 700 units per day, its total cost would be $225.   

a. What are the firm's ATC at these three levels of production?       

i. At 1,200 units per day, ATC = $.   

ii. At 1,000 units per day, ATC = $.       

iii. At 700 units per day, ATC = $.  

b. If all firms have the same cost structure, what is the highest possible price per unit that could exist as the market price in long-run equilibrium?

Answer 1

(a)

(i) Total cost of producing 1200 units is $600.

ATC = (Total cost / Output produced)

ATC = ($600 / 1200)

ATC = $0.5

At 1200 units per day, ATC = $0.5

(ii) Total cost of producing 1000 units is $350.

ATC = (Total cost / Output produced)

ATC = ($350 / 1000)

ATC = $0.35

At 1000 units per day, ATC = $0.35

(iii) Total cost of producing 700 units is $225

ATC = (Total cost / Output produced)

ATC = ($225 / 700)

ATC = $0.32

At 700 units per day, ATC = $0.32

(b) The firm is currently producing 1200 units. The firm is not in long-run equilibrium because the ATC at the 1200 units of output is higher than the ATC of producing 700 units.

The highest possible price per unit in the long-run equilibrium would be $0.32, the lowest ATC.

Long-run equilibrium condition of a perfectly competitive firm is given below;

P = MC = min. ATC

Answer: $0.32