Ch21Assignment3

# Ch21Assignment3 - producing 4 units it would lose \$82[=...

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3) a. The industry is purely competitive. This firm is a "price taker." The firm is so small relative to the size of the market that it can change its level of output without affecting the market price. b. c. The firm's demand curve is perfectly elastic. MR is constant and equal to P as you can see. 4) a. Yes, \$56 exceeds AVC and ATC at the profit-maximizing output. When we use the MR = MC rule, we see it will produce 8 units. Profits per unit are \$7.87 (= \$56 - \$48.13) - total profit = \$62.96 b. Yes, \$41 exceeds AVC at the loss--minimizing output. Using the MR = MC rule it will produce 6 units. Loss per unit or output is \$6.50 (= \$41 - \$47.50). Total loss = \$39 (= 6 × \$6.50), which is less than its total fixed cost of \$60. c. No, because \$32 is always less than AVC. If it did produce according to the MR = MC

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rule, its output would be 4--found by expanding output until MR no longer exceeds MC. By
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Unformatted text preview: producing 4 units, it would lose \$82 [= 4 (\$32 - \$52.50)]. By not producing, it would lose only its total fixed cost of \$60. d. Price Quantity Supplied, Single Firm Profit (+) or Loss (-) \$26 \$60 32 60 38 5 55 41 6 39 46 7 8 56 8 63 66 9 144 e. The firm will not produce if P < AVC. When P > AVC, the firm will produce in the short run at the quantity where P (= MR) is equal to its increasing MC. Therefore, the MC curve above the AVC curve is the firm's short-run supply curve, it shows the quantity of output the firm will supply at each price level. f. 7,500 9000 10,500 12,000 13,500 g. Equilibrium price is \$46. Equilibrium output is 10,500. Each firm will produce 7 units. Loss per unit will be \$1.14, or \$8 per firm. The industry will contract in the long run....
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Ch21Assignment3 - producing 4 units it would lose \$82[=...

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