A perfectly competitive firm faces the short-run cost schedule shown in Table 1.
a) Calculate average total cost (ATC=TC/Q), marginal cost (MC=ATC/AQ) and marginal revenue (MR-ATR/AQ) for each level of output. The price per unit of output is £16.
b) Plot ATC, MC and MR on a graph and mark the profit-maximising output. At what output is profit maximised?
c) How much profit/loss is made at the optimum level of output?
d) Assume market price declines to £9 per unit. If the firm's average variable cost is £9.5, should the firm shut down in the short run? In the long run? Explain.
e) If the firm is typical of other firms, what price will it charge in the long run? Explain.
A perfectly competitive firm maximizes profit by prducing output at level where P = MC
Total Revenue = Price * Quantity
Marginal Revenue = Change in Total Revenue / Change in Quantity
Marginal Cost = Change in Total Cost / Change in Quantity
At output of 32 units P or MR > MC as 16 > 4.83
At 32 units of output
TR = 512
TC = 122
(d)For a firm to reach a point of shutdown, the condition is that the variable cost(average) must be equal/less than the price(revenue in average).
With the given data, the AR is at £9, which is the price. But the variable cost(average) is higher than this at £9.5. Thus, there is no need for a shutdown, at this point.
In the long run, if the variable cost(average) goes below £9.5 or the price does not rise, then a need for requirement might occur. But it can be avoided if the firm starts charging a price that is higher.
(e)The price in the long will be equal to the total cost(average) and also with the marginal cost.
Thus, in this case, it will be
Thus, a price of will be charged.