Question

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Here is the cost information for a typical shoe store in a perfectly competitive industry.

Need answer for h and i

AVC ATC MC perfectly competitive industry. | Output/ Total Total Total AFC | Month Fixed variable | Cost, e Cost Cost TC 2 50 50 50 50 50 50 95 150 195 240 290 360 | 50 145 200 245 290 340 410 540 722 50 25 16.7 12.5 10 8.3 7.1 6.25 95 75 65 60 58 60 70 84 145 100 81.7 72.5 68 68.3 77.1 90.25 95 55 45 45 50 70 130 182 490 672

Answer 1

A perfectly competitive firm increases its output level as long as price is higher than or equal to marginal cost to maximize profit.

At the same time price should be higher than the minimum AVC otherwise firm will minimize losses by shutting down the production.

If the market price is $55,

We observe that price of $55 is lower than minimum AVC i.e. $58. So, output of a firm will be zero in short run (it will shut down)

If the market price is $65,

We observe that price of $65 is higher than minimum AVC. So, firm will decide to produce in short run. We observe that P>MC for Q=5 but P<MC for Q=6. So, optimal output of firm is 5 units.

If the market price is $75,

We observe that price of $75 is higher than minimum AVC. So, firm will decide to produce in short run. We observe that P>MC for Q=6 but P<MC for Q=7. So, optimal output of firm is 6 units.

If the market price is $135,

We observe that price of $135 is higher than minimum AVC. So, firm will decide to produce in short run. We observe that P>MC for Q=7 but P<MC for Q=8. So, optimal output of firm is 7 units.

If the market price is $185,

We observe that price of $185 is higher than minimum AVC. So, firm will decide to produce in short run. We observe that P>MC for Q=8 So, optimal output of firm is 8 units. (We do not have any information about costs after 8 units)

Market Price, P	Firm's quantity supplied, q	Industry Supply, Qs=10q	Industry Supply, Qs=50q
55	0	0	0
65	5	50	250
75	6	60	300
135	7	70	350
185	8	80	400

i)

We have observed that at a market price of $75

Price for firm=$75

Output of a firm in short run=6

Total Cost =TC=$410 (Refer the given table)

Total Revenue =TR=75*6=$450

Profit=TR-TC=450-410=$40

We can see that the firm is making positive economic profit. Other firms will be attracted towards the market. So, we can say that number of firms in long run will be more than 10.

Price in long run=Minimum ATC=$68

Output of a firm in long run=5

Economic Profit=(P-ATC)*q=(68-68)*5=0