Answer to Question #184092 in Microeconomics for Gabriel Atser

Question

Consider a perfectly competitive industry that is populated by 500 confectionary companies that supply premium chocolate. All companies within this chocolate industry have identical variable costs but – due to ongoing changes in chocolate manufacturers’ insurance policy –pay different one-time insurance premium when enter the chocolate market. Carefully explain whether– under circumstances outlined above – all companies within this chocolate industry would supply the same profit-maximizing quantities of output. Provide necessary formulae to prove your way of reasoning

Answer 1

Solution:

All the companies within this chocolate industry would supply the same profit-maximizing quantities of output. This is because, in a perfectly competitive market, all firms are price takers, charging the same price and their market share has no influence on prices. Also, the companies have identical variable costs, which means that their total costs are similar. The one-time insurance premium when a company enters the industry does not affect the profit-maximizing quantities.

 

In a perfectly competitive market, the output is determined at the point where price equals marginal cost and the price is normally determined by the marketplace since the company is a price taker.

The formula for determining profit-maximizing output in a perfectly competitive market is as follows:

The revenue is first calculated: Total Revenue = Price x Quantity

Then calculate the Marginal Revenue (MR) = Change in Total Revenue / Change in quantity

Then calculate the Marginal Cost (MC) = Change in Total Cost / Change in quantity

Total profit is maximized where marginal revenue equals marginal cost. The profit-maximizing level of output will be determined where MR = MC