Answer to Question #111543 in Microeconomics for Hiba

Question

A firm in a purely competitive industry is currently producing 1,000 units per day at a total cost of $700. If the firm produced 800 units per day, its total cost would be $450, and if it produced 500 units per day, its total cost would be $425.
Instructions: In parts a and c, round your answers to 2 decimal places. In part d, round your answer to 1 decimal place.
a. What are the firm's ATC at these three levels of production?
At 1,000 units per day,
At 800 units per day,
At 500 units per day,
b. If every firm in this industry has the same cost structure, is the industry in long-run competitive equilibrium?
c. From what you know about these firms’ cost structures, what is the highest possible price per unit that could exist as the market price in long-run equilibrium?
d. If that price ends up being the market price and if the normal rate of profit is 10 percent, then how big will each firm’s accounting profit per unit be?

Answer 1

a. What are the firm's ATC at these three levels of production?

$ATC = \dfrac{TC}{Q}$

Q TC ATC

500 $425 $0.85

800 $450 $0.56

1000 $700 $0.70

b. If every firm in this industry has the same cost structure, is the industry in long-run competitive equilibrium?

At the long-run equilibrium, firms produce at the minimum of the average total cost. From the given information, the minimum average total cost is ATC = $0.56. At this point, the quantity produced is 800 units. Since the firm is operating at Q = 1,000 units, the industry is not in the long run equilibrium.

c. From what you know about these firms’ cost structures, what is the highest possible price per unit that could exist as the market price in long-run equilibrium?

In the long-run equilibrium in a perfectly competitive market, the equilibrium price occurs at the minimum of the average total cost. At this point, $P = MC = ATC$ .

The minimum average total cost is $ATC = \$0.56$. Thus, the minimum price that a firm can charge in the long-run equilibrium is $P = \$0.56$ .

d. If that price ends up being the market price and if the normal rate of profit is 10 percent, then how big will each firm’s accounting profit per unit be?

The market price charged by each firm at the long run equilibrium is $P = \$0.56.$

If the normal rate of profit is 10%, then the accounting profit per unit for each firm is:

$\text{Accounting profit per unit} = 0.1\times \$0.56 = \$0.056$