Temple University
Economics 52
The Competitive Firm
Name
Social Security Number
Suppose that a perfectly competitive firm has the short run total cost function shown below.
Output
Total Cost (Dollars)
Marginal Cost
0
10
-
1
12
2
16
3
22
4
30
5
40
1. Complete the above table by filling in the MC, ATC and AVC columns.
2. What is the fixed cost for the representative firm? 10
3. Using the data in the table, at what output does Average Total Cost reach its minimum? 7.334
4. Using the data in the table, at what output does Average Variable Cost reach its minimum? 2
5. Suppose that the price in the market place is $6 per unit. What output will be produced by the firm represented by the data in the above table? 3
6. At the price and output of question 5 is the firm earning a profit? No
There are 1,000 firms in the industry identical to the one shown in the above table.
7. Suppose that the price in the market place is $6 per unit. What will be the aggregate output for the entire industry? 3000
The market demand curve for their homogeneous product is as follows:
Price (Dollars)
Quantity Demanded
3000
2000
6
1500
8
1000
8. What is the equilibrium price in the market? At a price of $4 each firm will supply 2 units, the same number as the quantity demanded at that price.
9. What will be the output of each firm ? 2
10. In the short run will firms shut down Yes or No? No, because they are able to meet average variable cost.
11. Will there be exit in the long run Yes or No? Yes, since each firm is not able to cover its fixed costs.
12. What will be the number of firms in this industry in the long run (you can assume that short run cost structures do not change as firms enter and exit)? At a price of $8 the quantity demanded is 1000. If each of 250 firms supplies 4 units then quantity supplied equals quantity demanded. If new firms entered and drove the price down to six then firms would again be losing money. The long run equilibrium would be a price between $6 and $8 with between 250 and 500 firms.
To continue further, the minimum of ATC is 7 1/3. In the long run the equilibrium price is equal to the minimum of ATC and firms just break even. At this break even price each firm will supply 3 units.
Now, if price is 7 1/3 then quantity demanded will be between 1000 and 1500. A price of $7 1/3 is 2/3 of the way between 6 and 8, so the quantity demanded will be 1500 - .667(500) = 1166. Since each firm supplies 3 units, there must be 1166/3 = 388 firms.