Question

Assume that the most efficient production technology available for making vitamin pills has the cost structure given in the following table. Note that output is measured as the number of bottles of vitamins produced per day and that costs include a normal profit. Instructions: In part a, round your answers to 2 decimal places. In parts cand d, enter your answers as whole numbers. Skipped a. What is ATC per unit for each level of output listed in the table? Output TC MC ATC 25,000 $100,000 $0.50 50,000 150,000 1.00 75,000 187,500 2.50 100,000 275,500 3.00 b. Is this a decreasing-cost industry? (Click to select)) c. Suppose that the market price for a bottle of vitamins is $2.50 and that at that price the total market quantity demanded is 75,000,000 bottles. How many firms will there be in this industry? firm(s) d. Suppose that, instead, the market quantity demanded at a price of $2.50 is only 75,000. How many firms do you expect there to be in this industry? firm(s)

Answer 1

a) Average Total Cost ATC

Total Cost / Output = 100000/25 = 4

Applying this formula we get ATC as 4, 3, 2.5, 2.76

b) As output increases, ATC is falling upto output level of 75,000. So it's decreasing cost industry upto Q = 75,000. As Q increases higher than 75,000, ATC starts increasing, so it's increasing cost after this level of output.

c) Market price equals marginal cost (MC) where P = MC = $2.5 and Q = 75,000 (individual firm output).

Number of firms = 75,000,000 / 75,000 = 1000

d) If market quantity demanded is 75,000, this is equal to an individual firm's output. So there will be only a single seller (monopoly).

e) The higher the market demand, the higher the number of firms, indicating the level of competition is getting more competitive. So, higher market demand compared to firm's output indicates the market is perfectly competitive (part c)