Question

Suppose you learn that a perfect competitor minimizes average variable economic cost when it produces 100 units per day and minimizes average total economic cost when it produces 250 units per day. The minimum average variable cost is $30 and the minimum average total cost is $50. Presume that the firm maximizes profit. Sketch the cost curves and use the sketch to help you answer the questions.

2a) When the market price is $50 the firm maximizes profit by

shutting down in the short run

producing between 0 and 100 units per day

producing 100 units per day

producing between 100 and 250 units per day

producing 250 units per day

producing more than 250 units per day

2b) When the market price is $50 the firm

suffers an economic loss in the short run

earns a positive economic profit in the short run

earns a normal rate of return in the short run

2c) When the market price is $50, in the long run

the number of firms in the market decreases and the market price decreases

the number of firms in the market decreases and the market price increases

the number of firms in the market increases and the market price decreases

the number of firms in the market increases and the market price increases

the number of firms and market price remain constant

Answer 1

The profit maximizing condition under perfectly competitive market is P=MC.

Here , it is given that minimum AVC= $30 at Q=100 units .

And minimum ATC= $50 at Q= 250 units.

We know AVC is at its minimum when MC= AVC.

And ATC is at its minimum when MC=ATC.

By plotting this we get the graph as shown below:

2. (a) When P=$50 ,we can see in the above graph that P=MC at Q=250 units,therefore the firm maximizes profit by producing 250 units per day.

(b) When P=$50 ,the firm earns a normal rate of return in the short run (i.e zero economic profit) because P=ATC.

(c) When P=$50, in the long run the number of firms and the market price remains constant because it is in long run equilibrium where P=MC=minimum ATC.