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sol_even_6 - Chapter 6 Perfectly Competitive Supply The...

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Chapter 6 Perfectly Competitive Supply: The cost side of the market Q. 2, 4,6, 8, 10 3 additional examples on Ch.6 1 additional example on Ch. 5
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Chapter 6 Problem 2 1) A price-taking firm makes air conditioners. The market price of one of their new air conditioners is $120. Its total cost information is given in the table below: How many air conditioners should the firm produce per day if its goal is to maximize its profit? Air conditioners per day Total cost ($ per day) 1 100 2 150 3 220 4 310 5 405 6 510 7 650 8 800
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What is a price-taking firm? A firm that cannot influence or has no control over the price of  a good or service.  Firms in perfect competition are said to be  price takers. Firms in perfect competition must make many decisions, e.g.,  choose the optimal output.  But one thing they do not decide  is the price at which to sell their output.   For example, in the market of wheat, the price is determined  in the market for wheat, and the firm has to take this price to  sell wheat.  The only decision for them is that to choose the  optimal output that maximizes their profits at this given price.
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To decide how many air conditioners should produce in order to  maximize its profit, we can  1) Apply the cost-benefit principle ,or, 2) Calculate the profit levels
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Method 1: The cost – benefit principle, we know that firm should continue to  produce an additional unit of goods as long as the additional  benefit to produce the good is at least as great as the additional  cost to produce the same good. That is, MB > MC At the market price of $120 for one air conditioner,  perfectly  competitive firm can sell as many air conditioners as they wish to in  order to maximize its profit.   The MB from selling an additional air conditioner is $120.
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To calculate the MC: By comparing the MB ($120) and the MC, the optimal output for this  firm to produce is  6 air conditioners per day .   The MC of each of the first 6 air conditioners produced each day is  $105, which is less than the MB of $120.  MB ($120) > MC ($105) Can this firm produce the 7 th  air conditioner? NO.   Air conditioners/day Total Cost ($/day) 1 100 2 150 3 220 4 310 5 405 6 510 7 650 8 800 MC 100 50 70 90 95 105 140 150
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Method 2) Calculate the profit: Profit = TR – TC TR = P x Q TC = FC + VC In order to maximize its profit, this firm should produce  6 air  conditioners per day , since it yields the largest profit among the  others, $210/day. Same result as by applying the cost-benefit principle.
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